EX-99.2 3 bpyex992q32017.htm EXHIBIT 99.2 Exhibit
Brookfield Property Partners L.P.

Condensed consolidated financial statements (unaudited)
As at September 30, 2017 and December 31, 2016 and
for the three and nine months ended September 30, 2017 and 2016

1             

Brookfield Property Partners L.P.
Condensed Consolidated Balance Sheets
Unaudited
 
 
As at
(US$ Millions)
Note
 
Sep. 30, 2017

Dec. 31, 2016

Assets
 
 
 
 
Non-current assets
 
 
 
 
Investment properties
4
 
$
51,400

$
48,784

Equity accounted investments
5
 
17,929

16,844

Participating loan interests
6
 
510

471

Property, plant and equipment
7
 
5,511

5,357

Goodwill
8
 
1,055

761

Intangible assets
9
 
1,240

1,141

Other non-current assets
10
 
784

500

Loans and notes receivable
 
 
177

71

Total non-current assets
 
 
78,606

73,929

Current assets
 
 
 
 
Loans and notes receivable
 
 
3

2

Accounts receivable and other
11
 
2,010

2,593

Cash and cash equivalents
 
 
1,398

1,456

Total current assets
 
 
3,411

4,051

Assets held for sale
12
 
2,126

147

Total assets
 
 
$
84,143

$
78,127

 
 
 
 
 
Liabilities and equity
 
 
 
 
Non-current liabilities
 
 
 
 
Debt obligations
13
 
$
32,266

$
28,423

Capital securities
14
 
4,086

3,801

Other non-current liabilities
16
 
1,147

1,011

Deferred tax liabilities
 
 
3,106

2,455

Total non-current liabilities
 
 
40,605

35,690

Current liabilities
 
 
 
 
Debt obligations
13
 
4,646

5,096

Capital securities
14
 
78

370

Accounts payable and other liabilities
17
 
2,964

2,749

Total current liabilities
 
 
7,688

8,215

Liabilities associated with assets held for sale
12
 
900

61

Total liabilities
 
 
49,193

43,966

 
 
 
 
 
Equity
 
 
 
 
Limited partners
18
 
7,386

7,536

General partner
18
 
6

6

Non-controlling interests attributable to:
 
 
 
 
Redeemable/exchangeable and special limited partnership units
18,19
 
14,487

14,523

Limited partnership units of Brookfield Office Properties Exchange LP
18,19
 
286

293

Interests of others in operating subsidiaries and properties
19
 
12,785

11,803

Total equity
 
 
34,950

34,161

Total liabilities and equity
 
 
$
84,143

$
78,127


See accompanying notes to the condensed consolidated financial statements.

2             

Brookfield Property Partners L.P.
Condensed Consolidated Income Statements
Unaudited
 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions, except per unit amounts)
Note
2017

2016

2017

2016

Commercial property revenue
20
$
1,066

$
946

$
3,111

$
2,632

Hospitality revenue
 
410

407

1,214

1,215

Investment and other revenue
21
34

56

232

142

Total revenue
 
1,510

1,409

4,557

3,989

Direct commercial property expense
22
419

367

1,201

1,008

Direct hospitality expense
23
249

254

788

783

Investment and other expense
 
1

—

123

1

Interest expense
 
493

430

1,475

1,247

Depreciation and amortization
24
69

63

201

188

General and administrative expense
25
147

146

454

415

Total expenses
 
1,378

1,260

4,242

3,642

 
 
 
 
 
 
Fair value gains, net
26
339

86

717

709

Share of net earnings from equity accounted investments
5
371

420

897

836

Income before income taxes
 
842

655

1,929

1,892

Income tax expense (benefit)
15
183

(961
)
419

(733
)
Net income
 
$
659

$
1,616

$
1,510

$
2,625

 
 
 
 
 
 
Net income attributable to:
 
 
 
 
 
Limited partners
 
$
61

$
462

$
88

$
683

General partner
 
—

—

—

—

Non-controlling interests attributable to:
 
 
 
 
 
Redeemable/exchangeable and special limited partnership units
 
104

772

149

1,141

Limited partnership units of Brookfield Office Properties Exchange LP
 
3

21

4

31

Interests of others in operating subsidiaries and properties
 
491

361

1,269

770

Total
 
$
659

$
1,616

$
1,510

$
2,625

 
 
 
 
 
 
Net income per LP Unit:
 
 
 
 
 
Basic
18
$
0.22

$
1.61

$
0.31

$
2.37

Diluted
18
$
0.22

$
1.56

$
0.31

$
2.31


See accompanying notes to the condensed consolidated financial statements.

3             

Brookfield Property Partners L.P.
Condensed Consolidated Statements of Comprehensive Income
Unaudited
 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
Note
2017

2016

2017

2016

Net income
 
$
659

$
1,616

$
1,510

$
2,625

Other comprehensive income (loss)
28
 
 
 
 
Items that may be reclassified to net income:
 
 
 
 
 
Foreign currency translation
 
278

(17
)
573

(68
)
Cash flow hedges
 
1

(20
)
40

(108
)
Available-for-sale securities
 
(1
)
(3
)
—

(3
)
Equity accounted investments
 
5

2

8

2

Items that will not be reclassified to net income:
 
 
 
 
 
Share of revaluation surplus on equity accounted investments
 
—

(1
)
—

(11
)
Remeasurement of defined benefit obligations
 
—

—

(2
)
—

Total other comprehensive income (loss)
 
283

(39
)
619

(188
)
Total comprehensive income (loss)
 
$
942

$
1,577

$
2,129

$
2,437

 
 
 
 
 
 
Comprehensive income attributable to:
 
 
 
 
 
Limited partners
 
 
 
 
 
Net income
 
$
61

$
462

$
88

$
683

Other comprehensive income (loss)
 
77

(5
)
145

(91
)
 
 
138

457

233

592

Non-controlling interests
 
 
 
 
 
Redeemable/exchangeable and special limited partnership units
 
 
 
 
 
Net income
 
104

772

149

1,141

Other comprehensive income (loss)
 
131

(7
)
247

(151
)
 
 
235

765

396

990

Limited partnership units of Brookfield Office Properties Exchange LP
 
 
 
 
 
Net income
 
3

21

4

31

Other comprehensive income (loss)
 
3

—

6

(4
)
 
 
6

21

10

27

Interests of others in operating subsidiaries and properties
 
 
 
 
 
Net income
 
491

361

1,269

770

Other comprehensive income (loss)
 
72

(27
)
221

58

 
 
563

334

1,490

828

Total comprehensive income
 
$
942

$
1,577

$
2,129

$
2,437


See accompanying notes to the condensed consolidated financial statements.

4             


Brookfield Property Partners L.P.
Condensed Consolidated Statements of Changes in Equity
 
Limited partners
 
General partner
 
Non-controlling interests
 
Unaudited
(US$ Millions)
Capital
Retained earnings
Ownership Changes
Accumulated other comprehensive (loss) income
Total limited partners equity
 
Capital
Retained earnings
Accumulated other comprehensive (loss) income
Total general partner equity
 
Redeemable /
exchangeable and special limited partnership units
Limited partnership units of Brookfield Office Properties Exchange LP
Interests of others in operating subsidiaries and properties
Total equity
Balance as at Dec. 31, 2016
$
5,743

$
2,085

$
127

$
(419
)
$
7,536

 
$
4

$
2

$
—

$
6

 
$
14,523

$
293

$
11,803

$
34,161

Net income
—

88

—

—

88

 
—

—

—

—

 
149

4

1,269

1,510

Other comprehensive income
—

—

—

145

145

 
—

—

—

—

 
247

6

221

619

Total comprehensive income
—

88

—

145

233

 
—

—

—

—

 
396

10

1,490

2,129

Distributions
—

(226
)
—

—

(226
)
 
—

—

—

—

 
(387
)
(10
)
(1,219
)
(1,842
)
Issuance / repurchase of interests in operating subsidiaries
(136
)
(39
)
12

—

(163
)
 
—

—

—

—

 
(46
)
—

711

502

Exchange of exchangeable units
6

—

—

—

6

 
—

—

—

—

 
1

(7
)
—

—

Balance as at Sep. 30, 2017
$
5,613

$
1,908

$
139

$
(274
)
$
7,386

 
$
4

$
2

$
—

$
6

 
$
14,487

$
286

$
12,785

$
34,950

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as at Dec. 31, 2015
$
5,815

$
1,791

$
126

$
(307
)
$
7,425

 
$
4

$
2

$
—

$
6

 
$
14,218

$
309

$
8,975

$
30,933

Net income
—

683

—

—

683

 
—

—

—

—

 
1,141

31

770

2,625

Other comprehensive (loss)
—

—

—

(91
)
(91
)
 
—

—

—

—

 
(151
)
(4
)
58

(188
)
Total comprehensive income (loss)
—

683

—

(91
)
592

 
—

—

—

—

 
990

27

828

2,437

Distributions
—

(220
)
—

—

(220
)
 
—

—

—

—

 
(368
)
(10
)
(566
)
(1,164
)
Issuance / repurchase of interest in operating subsidiaries
(61
)
(108
)
—

—

(169
)
 
—

—

—

—

 
(180
)
(4
)
2,623

2,270

Exchange of exchangeable units
21

—

1

—

22

 
—

—

—

—

 
—

(22
)
—

—

Balance as at Sep. 30, 2016
$
5,775

$
2,146

$
127

$
(398
)
$
7,650

 
$
4

$
2

$
—

$
6

 
$
14,660

$
300

$
11,860

$
34,476


See accompanying notes to the condensed consolidated financial statements.

5             


Brookfield Property Partners L.P.
Condensed Consolidated Statements of Cash Flows
Unaudited
 
 
Nine Months Ended Sep. 30,
 
(US$ Millions)
Note
 
2017

2016

Operating activities
 
 
 
 
Net income
 
 
$
1,510

$
2,625

Share of equity accounted earnings, net of distributions
 
 
(660
)
(558
)
Fair value (gains), net
26
 
(717
)
(709
)
Deferred income tax expense (benefit)
15
 
314

(832
)
Depreciation and amortization
24
 
201

188

Working capital and other
 
 
(261
)
(853
)
 
 
 
387

(139
)
Financing activities
 
 
 
 
Debt obligations, issuance
 
 
13,918

11,013

Debt obligations, repayments
 
 
(11,355
)
(10,135
)
Capital securities issued
 
 
249

—

Capital securities redeemed
 
 
(297
)
(171
)
Non-controlling interests, issued
 
 
1,719

2,439

Non-controlling interests, purchased
 
 
(483
)
(146
)
Repurchases of limited partnership units
 
 
(136
)
(25
)
Distributions to non-controlling interests in operating subsidiaries
 
 
(1,198
)
(593
)
Distributions to limited partnership unitholders
 
 
(226
)
(220
)
Distributions to redeemable/exchangeable and special limited partnership unitholders
 
 
(387
)
(368
)
Distributions to holders of Brookfield Office Properties Exchange LP units
 
 
(10
)
(10
)
 
 
 
1,794

1,784

Investing activities
 
 
 
 
Investment properties and subsidiaries, proceeds of dispositions
 
 
1,515

2,103

Property acquisitions and capital expenditures
 
 
(3,739
)
(3,992
)
Investment in equity accounted investments
 
 
(471
)
(382
)
Proceeds from sale and distributions of equity accounted investments and participating loan interests
 
 
891

953

Financial assets and other
 
 
(262
)
285

Intangible assets, dispositions
 
 
—

147

Other property, plant and equipment investments, net of dispositions
 
 
(187
)
(138
)
Impact to cash from deconsolidation of investments and reclassification of assets to held for sale, net of cash acquired in business combinations
 
 
(55
)
85

Restricted cash and deposits
 
 
34

(199
)
 
 
 
(2,274
)
(1,138
)
Cash and cash equivalents
 
 
 
 
Net change in cash and cash equivalents during the period
 
 
(93
)
507

Effect of exchange rate fluctuations on cash and cash equivalents held in foreign currencies
 
 
35

20

Balance, beginning of period
 
 
1,456

1,035

Balance, end of period
 
 
$
1,398

$
1,562

 
 
 
 
 
Supplemental cash flow information
 
 
 
 
Cash paid for:
 
 
 
 
Income taxes
 
 
$
55

$
68

Interest (excluding dividends on capital securities)
 
 
$
1,150

$
816


See accompanying notes to the condensed consolidated financial statements.

6             


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

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

The partnership’s sole material asset at September 30, 2017 is a 37% managing general partnership unit interest in Brookfield Property L.P. (the “operating partnership”), which holds the partnership’s interest in commercial and other income producing property operations. The partnership’s interest in the operating partnership is comprised solely of an interest in managing general partner units (“GP Units”). The GP Units provide the partnership with the power to direct the relevant activities of the operating partnership.

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

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

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

These condensed consolidated financial statements as of and for the three and nine months ended September 30, 2017 were approved and authorized for issue by the Board of Directors of the partnership on October 31, 2017.
 
b)
Basis of presentation
The interim condensed consolidated financial statements are prepared using the same accounting policies and methods as those used in the consolidated financial statements for the year ended December 31, 2016 with the exception of the adoption of Amendments to IAS 12, Income Taxes, effective January 1, 2017, as discussed in Note 2(c) below. Consequently, the information included in these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the partnership’s annual report on Form 20-F for the year ended December 31, 2016.

The interim condensed consolidated financial statements are unaudited and reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods presented in accordance with IAS 34. The results reported in these interim condensed consolidated financial statements should not necessarily be regarded as indicative of results that may be expected for the entire year.

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

c)
Adoption of Accounting Standards
The partnership adopted an Amendment to IAS 12, Income Taxes effective January 1, 2017. The amendment clarifies the following aspects: (i) unrealized losses on debt instruments measured at fair value and measured at cost for tax purposes give rise to a deductible temporary difference regardless of whether the debt instrument’s holder expects to recover the carrying amount of the debt instrument by sale or by use; (ii) the carrying amount of an asset does not limit the estimation of probable future taxable profits; (iii) estimates for future taxable profits exclude tax deductions resulting from the reversal of deductible temporary differences; and (iv) an entity assesses a deferred tax asset in combination with other deferred tax assets. The amendment does not have any impact to the consolidated financial statements of the partnership as the partnership previously calculated the deferred tax assets and liabilities in accordance with the clarified guidance.

d)
Estimates
The preparation of the partnership’s interim condensed consolidated financial statements in accordance with IAS 34 requires the use of certain critical accounting estimates and assumptions. It also requires management to exercise judgment in applying the partnership’s accounting policies. The accounting policies and critical estimates and assumptions have been set out in Note 2, Summary of Significant Accounting Policies, to the partnership’s consolidated financial statements for the year ended December 31, 2016 and have been consistently applied in the preparation of the interim condensed consolidated financial statements as of and for the three and nine months ended September 30, 2017.

e)
Future Accounting Policy
IFRS 15, Revenue from Contracts with Customers

IFRS 15, Revenue from Contracts with Customers specifies how and when revenue should be recognized as well as requiring more informative and relevant disclosures. The standard also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The standard supersedes IAS 18, Revenue, IAS 11, Construction Contracts and a number of revenue-related

7             


interpretations. IFRS 15 applies to nearly all contracts with customers: the main exceptions are leases, financial instruments and insurance contracts. IFRS 15 must be applied for periods beginning on or after January 1, 2018 with early application permitted. An entity may adopt the standard on a fully retrospective basis or on a modified retrospective basis. 
 
To date, management has participated in strategic planning sessions with its subsidiaries and associates and has developed an adoption plan. Management has also identified major revenue streams and accumulated detailed information on major contracts that may be impacted by the changes at the transition date. Next steps involve completing the overall analysis, assessing any potential impact to IT systems and internal controls, and reviewing the additional disclosure required by the standard. Management is progressing as planned for the implementation of the standard.
 
Management plans to adopt the standard using the modified retrospective approach.  This method will result in a cumulative catch-up adjustment to retained earnings as of January 1, 2018 as if the standard had always been in effect. No material adjustments required upon adoption have been noted to date, however further technical analysis and quantitative assessments are required to conclude on the overall impact.

Management continues to evaluate the overall impact of IFRS 15 on the consolidated financial statements.

IFRS 9, Financial Instruments

In July 2014, the IASB issued the final publication of the IFRS 9, Financial Instruments, superseding the current IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 establishes principles for the financial reporting of financial assets and financial liabilities that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of an entity’s future cash flows. This new standard also includes a new general hedge accounting standard which will align hedge accounting more closely to risk management. It does not fully change the types of hedging relationships or the requirement to measure and recognize ineffectiveness, however, it will allow more hedging strategies that are used for risk management to qualify for hedge accounting and introduce more judgment to assess the effectiveness of a hedging relationship. The standard has a mandatory effective date for annual periods beginning on or after January 1, 2018, with early adoption permitted.

The partnership has a global team in place to evaluate the financial statement and the administrative impact of IFRS 9 on its consolidated financial statements. The partnership plans to adopt the standard retrospectively with no restatement of comparatives. A cumulative catch-up adjustment, if any, will be recorded through equity upon initial adoption. To date, management has participated in strategic planning sessions with its subsidiaries and associates. The partnership has completed the issue identification phase of the transition project and is currently quantifying the impact. No material adjustments required upon adoption have been noted to date, however further technical analysis and quantitative assessments are required to conclude on the overall impact.

Management continues to evaluate the overall impact of IFRS 9 on the consolidated financial statements.

IFRS 16, Leases
In January 2016, the IASB published a new standard, IFRS 16, Leases. The new standard brings most leases on balance sheets, eliminating the distinction between operating and finance leases. Lessor accounting, however, remains largely unchanged and the distinction between operating and finance leases is retained. IFRS 16 supersedes IAS 17, Leases and related interpretations and is effective for periods beginning on or after January 1, 2019, with earlier adoption permitted if IFRS 15 has also been applied. The partnership is in the process of determining the impact of IFRS 16 on its consolidated financial statements.

NOTE 3. BUSINESS ACQUISITIONS AND COMBINATIONS
The partnership accounts for business combinations using the acquisition method of accounting under IFRS 3, Business Combinations pursuant to which the cost of acquiring a business is allocated to its identifiable tangible and intangible assets and liabilities on the basis of the estimated fair values at the date of acquisition. Financial results of each transaction are included within the partnership’s condensed consolidated statements of income from the dates of each acquisition.

On April 10, 2017, the partnership acquired a portfolio of 13 student housing properties (“Student Housing”) across the United Kingdom for total consideration of $358 million. The acquisition was funded with a cash contribution of $223 million from a fund sponsored by Brookfield Asset Management which was drawn on subscription facilities, with the remainder funded through debt financing. The partnership recognized a bargain purchase gain of $27 million in fair value gains, net on its consolidated income statements, which was driven by an improved operational forecast that was of a higher certainty as of the acquisition date than at the time the total consideration was agreed upon. As of September 30, 2017, the valuation of investment properties, property debt obligations and bargain purchase gain were still under evaluation by the partnership. Accordingly, they have been accounted for on a provisional basis.

On March 31, 2017, the partnership acquired One Post Street, a 424,000 square feet office building in San Francisco for total consideration of $153 million. The acquisition was funded with a cash contribution of $31 million from the partnership, with the remainder from a fund sponsored by Brookfield Asset Management. As of September 30, 2017, the valuation of investment property was still under evaluation by the partnership. Accordingly, it has been accounted for on a provisional basis.

On March 31, 2017, the partnership acquired a portfolio consisting of nine office properties encompassing approximately 1.1 million square feet in the U.S. (“TA Office”), for total consideration of $214 million. The acquisition was funded with a cash contribution of $81 million from a fund sponsored by Brookfield Asset Management which was drawn on subscription facilities, with the remainder funded through debt financing. The acquisition resulted in an approximately $13 million bargain purchase gain, which was recognized in fair value gains, net in the partnership’s consolidated income statements. The bargain purchase gain reflected a portfolio discount negotiated with the seller as a result of the partnership’s

8             

capability to execute the portfolio acquisition. During the third quarter of 2017, the partnership completed the purchase price allocation for the acquisition of TA Office. No material changes were made to the provisional purchase price allocation.

On March 9, 2017, the partnership acquired a portfolio of manufactured housing communities (“Manufactured Housing”) in the United States for total consideration of $768 million. The acquisition was funded with a cash contribution of $578 million from a fund sponsored by Brookfield Asset Management which was drawn on subscription facilities, with the remainder funded through debt financing. The acquisition of the Manufactured Housing portfolio generated a bargain purchase gain of $107 million as a result of changes in the underlying market conditions since signing the purchase and sale agreement in the second quarter of 2016. During the third quarter of 2017, the partnership completed the purchase price allocation for the acquisition of Manufactured Housing. No material changes were made to the provisional purchase price allocation.

On July 6, 2016, the partnership acquired an additional 67% of the voting equity of Rouse Properties, Inc. (“Rouse”) for consideration of $1,063 million or $18.25 per share. Rouse is a real estate investment trust focused on a diverse portfolio of malls and retail centers encompassing approximately 24.1 million square feet across the United States at the time of acquisition. On the acquisition date, the partnership previously owned 33% of the voting equity of Rouse and accounted for its interest as an equity accounted investment. As a result of the acquisition, the partnership owns 100% of the voting equity of Rouse. The partnership accounted for the acquisition as a step acquisition and remeasured its existing 33% equity interest in Rouse to fair value at the acquisition date. At the time of the acquisition, holders of 12% of the voting equity of Rouse exercised their appraisal rights, which delayed the partnership’s payment for their shares of Rouse until the fair value of their equity as at the acquisition date is determined through legal proceedings. The partnership recorded a provision of $123 million in other non-current liabilities representing the partnership’s obligation to the third party former equity-holders of Rouse who exercised these appraisal rights. Total consideration for the acquisition consisted of a cash contribution of $587 million from a fund sponsored by Brookfield Asset Management, which was drawn on subscription facilities, the fair value of the partnership’s existing 33% equity in Rouse as at the acquisition, and the fair value of the delayed settlement to the shareholders who have exercised their appraisal rights. During the second quarter of 2017, the partnership completed the purchase price allocation for the acquisition of Rouse. No material changes were made to the provisional purchase price allocation.

On November 17, 2016, the partnership acquired the International Finance Center (“IFC Seoul”), a 5.4 million square foot mixed-use complex in Seoul, South Korea for total consideration of $2,114 million. The acquisition was funded with a cash contribution of $330 million from third-party co-investors, and $545 million from a fund sponsored by Brookfield Asset Management which was drawn on subscription facilities, with the remainder funded through debt financing. During the third quarter of 2017, the partnership completed the purchase price allocation for the acquisition of IFC Seoul and recognized a goodwill of $221 million and a deferred tax liability of $298 million. No other material changes were made to the provisional purchase price allocation.

The following table summarizes the impact of significant business combinations during the nine months ended September 30, 2017:

(US$ Millions)
Manufactured Housing

TA Office

One Post Street

Student Housing

Other

Total

Investment properties
$
2,107

$
235

$
245

$
392

$
825

$
3,804

Accounts receivable and other
79

5

—

—

14

98

Cash and cash equivalents
16

—

4

—

3

23

Total assets
2,202

240

249

392

842

3,925

Less:
 
 
 

 
 
Debt obligations
(1,261
)
—

—

—

—

(1,261
)
Accounts payable and other
(36
)
(13
)
(2
)
(7
)
(2
)
(60
)
Non-controlling interests(1)
(30
)
—

(94
)
—

—

(124
)
Net assets acquired
$
875

$
227

$
153

$
385

$
840

$
2,480

Consideration(2)
$
768

$
214

$
153

$
358

$
830

$
2,323

Transaction costs
$
16

$
2

$
—

$
6

$
19

$
43

(1)
Includes non-controlling interests recognized on business combinations measured as the proportionate share of the fair value of the assets, liabilities and contingent liabilities on the date of acquisition.
(2)
Includes consideration paid with funds received from issuance of non-controlling interests to certain institutional investors in funds sponsored by Brookfield Asset Management.

In the period from each acquisition date to September 30, 2017, the partnership recorded revenue and net income in connection with these acquisitions of approximately $187 million and $78 million, respectively. If the acquisitions had occurred on January 1, 2017, the partnership’s total revenue and net income would have been $4,638 million and $1,542 million, respectively, for the nine months ended September 30, 2017.

Acquisition-related transaction costs, which primarily relate to legal and consulting fees, are expensed as incurred in accordance with IFRS 3 and included in general and administrative expense on the consolidated income statement.


9             

NOTE 4. INVESTMENT PROPERTIES
The following table presents a roll forward of the partnership’s investment property balances, all of which are considered Level 3 within the fair value hierarchy, for the nine months ended September 30, 2017 and the year ended December 31, 2016:

 
Nine months ended Sep. 30, 2017
Year ended Dec. 31, 2016
(US$ Millions)
Commercial properties

Commercial developments

Total

Commercial properties

Commercial developments

Total

Balance, beginning of period
$
45,699

$
3,085

$
48,784

$
39,111

$
2,488

$
41,599

Changes resulting from:
 
 
 
 
 
 
  Property acquisitions
3,778

72

3,850

8,697

310

9,007

  Capital expenditures
583

704

1,287

770

835

1,605

Property dispositions(1)
(456
)
(651
)
(1,107
)
(876
)
(13
)
(889
)
Fair value gains, net
678

194

872

290

251

541

Foreign currency translation
998

144

1,142

68

(213
)
(145
)
Transfer between commercial properties and commercial developments
943

(943
)
—

562

(562
)
—

Reclassifications to assets held for sale and other changes
(3,175
)
(253
)
(3,428
)
(2,923
)
(11
)
(2,934
)
Balance, end of period
$
49,048

$
2,352

$
51,400

$
45,699

$
3,085

$
48,784

(1) 
Property dispositions represent the carrying value on date of sale.

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

Commercial developments are also measured using a discounted cash flow model, net of costs to complete, as of the balance sheet date. Development sites in the planning phases are measured using comparable market values for similar assets. In accordance with its policy, the partnership generally measures and records its commercial properties and developments using valuations prepared by management.

The partnership generally does not measure or record its properties based on valuations prepared by external valuation professionals. However, for certain recently acquired subsidiaries, the partnership has used valuations prepared by external valuation professionals. As it pertains to our Core Office investment properties, the partnership adheres to a policy in which each property is externally appraised by qualified external valuation professionals at least once every three years. These external appraisals are considered in arriving at the partnership’s conclusion on values.

10             

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

 
 
Sep. 30, 2017
Dec. 31, 2016
Consolidated properties
Primary valuation method
Discount rate

Terminal capitalization rate

Investment horizon (years)

Discount rate

Terminal capitalization rate

Investment horizon (years)
Core Office
 
 
 
 
 
 
 
    United States
Discounted cash flow
6.9
%
5.6
%
11

6.8
%
5.6
%
12
    Canada
Discounted cash flow
6.3
%
5.5
%
10

6.2
%
5.5
%
10
    Australia
Discounted cash flow
7.1
%
6.1
%
10

7.3
%
6.1
%
10
    Europe(1)
Residual land value
—

—

—

6.0
%
5.0
%
12
    Brazil
Discounted cash flow
9.7
%
7.6
%
7

9.3
%
7.5
%
10
Opportunistic Office
Discounted cash flow
9.4
%
6.8
%
8

9.9
%
7.6
%
7
Opportunistic Retail
Discounted cash flow
8.6
%
7.6
%
10

10.2
%
8.1
%
12
Industrial
Discounted cash flow
7.0
%
6.4
%
10

7.4
%
6.6
%
10
Multifamily(2)
Direct capitalization
4.8
%
n/a

n/a

4.9
%
n/a

n/a
Triple Net Lease(2)
Direct capitalization
6.4
%
n/a

n/a

6.1
%
n/a

n/a
Self-storage(2)
Direct capitalization
5.8
%
n/a

n/a

6.2
%
n/a

n/a
Student Housing(2)
Direct capitalization
5.8
%
n/a

n/a

5.9
%
n/a

n/a
Manufactured Housing(2)
Direct capitalization
5.8
%
n/a

n/a

n/a

n/a

n/a
(1)
In the third quarter of 2017, 20 Canada Square in London was sold. The remaining Europe properties are valued on a residual land value method.
(2)
The valuation method used to value multifamily, triple net lease, self-storage, student housing, and manufactured housing properties is the direct capitalization method. The rates presented as the discount rate relate to the overall implied capitalization rate. The terminal capitalization rate and investment horizon are not applicable.
 

The following table presents the partnership’s investment properties measured at fair value in the consolidated financial statements and the level of the inputs used to determine those fair values in the context of the hierarchy as disclosed in Note 2(j) of the consolidated financial statements for the year ended December 31, 2016:
 
Sep. 30, 2017
Dec. 31, 2016
 
 
 
Level 3
 
 
Level 3
(US$ Millions)
Level 1

Level 2

Commercial properties

Commercial developments

Level 1

Level 2

Commercial properties

Commercial developments

Core Office
 
 
 
 
 
 
 
 
United States
$
—

$
—

$
16,091

$
507

$
—

$
—

$
16,142

$
387

Canada
—

—

5,122

102

—

—

4,015

598

Australia
—

—

2,434

—

—

—

2,112

—

Europe
—

—

104

845

—

—

583

1,247

Brazil
—

—

337

—

—

—

250

65

Opportunistic
 
 
 
 
 
 
 
 
Opportunistic Office
—

—

6,448

288

—

—

5,645

208

Opportunistic Retail
—

—

3,382

6

—

—

4,214

3

Industrial
—

—

1,409

442

—

—

2,173

505

Multifamily
—

—

3,894

—

—

—

3,574

—

Triple Net Lease
—

—

4,786

—

—

—

4,790

—

Self-storage
—

—

1,737

57

—

—

1,592

32

Student Housing
—

—

1,159

105

—

—

609

40

Manufactured Housing
—

—

2,145

—

—

—

—

—

Total
$
—

$
—

$
49,048

$
2,352

$
—

$
—

$
45,699

$
3,085


11             

The following table presents a sensitivity analysis to the impact of a 25 basis point movement of the discount rate and terminal capitalization or overall implied capitalization rate on fair values of the partnership’s commercial properties for the nine months ended September 30, 2017, for properties valued using the discounted cash flow or direct capitalization method, respectively:

 
Sep. 30, 2017
(US$ Millions)
Impact on fair value of commercial properties

Core Office
 
United States
$
752

Canada
223

Australia
138

Brazil
36

Opportunistic
 
Opportunistic Office
273

Opportunistic Retail
119

Industrial
72

Multifamily
194

Triple Net Lease
172

Self-storage
68

Student Housing
53

Manufactured Housing
89

Total
$
2,189


 

12             

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

 
 
 
Proportion of ownership interests/voting rights held by the partnership
Carrying value
(US$ Millions)
Principal activity
Principal place of business
Sep. 30, 2017

Dec. 31, 2016

Sep. 30, 2017

Dec. 31, 2016

Joint Ventures
 
 
 
 
 
 
Canary Wharf Joint Venture(1)
Property holding company
United Kingdom
50
%
50
%
$
3,295

$
2,866

Manhattan West, New York
Property holding company
United States
56
%
56
%
1,273

1,214

Grace Building, New York
Property holding company
United States
50
%
50
%
602

585

Southern Cross East, Melbourne(2)
Property holding company
Australia
50
%
50
%
403

346

Brookfield D.C. Office Partners LLC ("D.C.Fund"), Washington, D.C.
Property holding company
United States
51
%
51
%
330

327

Brookfield Fairfield U.S. Multifamily Value Add Fund II, L.P. ("VAMF II")
Property holding company
United States
37
%
37
%
298

296

E&Y Complex, Sydney
Property holding company
Australia
50
%
50
%
304

263

Principal Place - Commercial, London(3)
Property holding company
United Kingdom
50
%
100
%
217

—

Potsdamer Platz, Berlin
Holding company
Germany
25
%
25
%
184

161

Republic Plaza, Denver
Property holding company
United States
50
%
50
%
130

128

One New York Plaza, New York
Property holding company
United States
15
%
15
%
118

116

75 State Street, Boston
Property holding company
United States
26
%
26
%
93

90

245 Park Avenue, New York(4)
Property holding company
United States
—%

51
%
—

706

Brookfield Brazil Retail Fundo de Investimento em Participaçõe ("Brazil Retail")(5)
Holding company
Brazil
46
%
46
%
352

—

Other
Various
Various
12% - 90%

13% - 83%

1,351

1,055

 
 
 
 
 
8,950

8,153

Associates
 
 
 
 
 
 
General Growth Properties, Inc. ("GGP")
Real estate investment trust
United States
29%

29%

7,682

7,453

China Xintiandi (“CXTD”)(6)
Property holding company
China
22%

22%

478

446

Diplomat Resort and Spa ("Diplomat")
Real estate investment trust
United States
90%

90%

308

355

Brookfield Premier Real Estate Partners Pooling LLC ("BPREP")
Property holding company
United States
9%

19%

121

113

Other
Various
Various
23% - 32%

23% - 49%

390

324

 
 
 
 
 
8,979

8,691

Total
 
 
 
 
$
17,929

$
16,844

(1) 
Stork Holdco LP is the joint venture through which the partnership acquired Canary Wharf Group plc (“Canary Wharf”) in London.
(2) 
The partnership exercises joint control over this jointly controlled asset through a participating loan agreement with Brookfield Asset Management that is convertible at any time into a direct equity interest in the entity.
(3) 
The partnership sold 50% of its interest in Principal Place - Commercial during the first quarter of 2017. As a result of the transaction, the partnership retained joint control and will recognize its interest as an equity accounted investment.
(4) 
The partnership sold its interest in 245 Park Avenue in Manhattan, New York during the second quarter of 2017.
(5) 
In the second quarter of 2017, the partnership entered into an amended management agreement with its co-investors in Brazil Retail resulting in the loss of control over the venture. Subsequent to entering into this agreement, the partnership will recognize its interest in Brazil Retail as an equity accounted investment.
(6) 
The partnership’s interest in CXTD is held through a subsidiary, BSREP CXTD Holdings L.P., in which it has an approximate 31% interest.

The fair value of the common shares of GGP held by the partnership based on the trading price of GGP common stock as of September 30, 2017 was $5,304 million (December 31, 2016 - $6,379 million).

There are no quoted market prices for the partnership’s other equity accounted investments.

13             

The following table presents the change in the balance of the partnership’s equity accounted investments as of September 30, 2017 and December 31, 2016:

 
Nine months ended

Year ended

(US$ Millions)
Sep. 30, 2017

Dec. 31, 2016

Equity accounted investments, beginning of period
$
16,844

$
17,638

Additions
904

715

Disposals and return of capital distributions
(165
)
(1,180
)
Share of net income
897

1,019

Distributions received
(237
)
(524
)
Foreign currency translation
393

(646
)
Reclassification to assets held for sale
(712
)
(340
)
Other comprehensive income and other
5

162

Equity accounted investments, end of period
$
17,929

$
16,844


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

 
 
Sep. 30, 2017
Dec. 31, 2016
Equity accounted investments
Primary valuation method
Discount rate

Terminal capitalization rate

Investment horizon (yrs)

Discount rate

Terminal capitalization rate

Investment horizon (yrs)

Core Office
 
 
 
 
 
 
 
    United States
Discounted cash flow
6.5
%
5.4
%
10

6.3
%
5.3
%
11

    Australia
Discounted cash flow
7.0
%
5.9
%
10

7.1
%
6.0
%
10

    Europe(1)
Discounted cash flow
4.8
%
4.9
%
10

5.1
%
4.8
%
10

Core Retail
 
 
 
 
 
 
 
    United States
Discounted cash flow
6.9
%
5.5
%
10

7.4
%
5.9
%
10

Opportunistic Office
Discounted cash flow
6.8
%
6.0
%
10

7.7
%
6.0
%
10

Opportunistic Retail
Discounted cash flow
13.5
%
8.2
%
11

11.0
%
9.0
%
10

Industrial
Discounted cash flow
6.5
%
6.0
%
10

6.9
%
6.1
%
10

Multifamily(2)
Direct capitalization
5.2
%
n/a

n/a

5.1
%
n/a

n/a

(1) 
Certain properties in Europe accounted under the equity method are valued using both discounted cash flow and yield models. For comparative purposes, the discount and terminal capitalization rates and investment horizons calculated under the discounted cash flow method are presented in the table above.
(2) 
The valuation method used to value multifamily investments is the direct capitalization method. The rates presented as the discount rate relate to the overall implied capitalization rate. The terminal capitalization rate and investment horizon are not applicable.

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

(US$ Millions)
Sep. 30, 2017

Dec. 31, 2016

Non-current assets
$
81,745

$
76,422

Current assets
4,233

3,776

Total assets
85,978

80,198

Non-current liabilities
31,774

27,728

Current liabilities
4,777

6,110

Total liabilities
36,551

33,838

Net assets
49,427

46,360

Partnership’s share of net assets
$
17,929

$
16,844


14             

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2017

2016

2017

2016

Revenue
$
1,236

$
1,456

$
3,634

$
4,021

Expenses
738

505

2,144

2,556

Income from equity accounted investments(1)
129

100

375

335

Income before fair value gains, net
627

1,051

1,865

1,800

Fair value gains, net
535

461

750

638

Net income
1,162

1,512

2,615

2,438

Partnership’s share of net earnings
$
371

$
420

$
897

$
836

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

NOTE 6. PARTICIPATING LOAN INTERESTS
Participating loan interests represent interests in certain properties in Australia that do not provide the partnership with control over the entity that owns the underlying property and are accounted for as loans and receivables and held at amortized cost on the consolidated balance sheets. The instruments, which are receivable from a wholly-owned subsidiary of Brookfield Asset Management, have contractual maturity dates of September 26, 2020 and February 1, 2023, subject to the partnership’s prior right to convert into direct ownership interests in the underlying commercial properties, and have contractual interest rates that vary with the results of operations of those properties.

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

(US$ Millions)
Participation interest
Carrying value
Name of property
Sep. 30, 2017

Dec. 31, 2016

Sep. 30, 2017

Dec. 31, 2016

Darling Park Complex, Sydney
30
%
30
%
$
246

$
215

IAG House, Sydney
50
%
50
%
110

101

Jessie Street, Sydney
100
%
100
%
154

155

Total participating loan interests
 
 
$
510

$
471


Included in the balance of participating loan interests is an embedded derivative representing the partnership’s right to participate in the changes in the fair value of the referenced properties. The embedded derivative is measured at fair value with changes in fair value reported through earnings in fair value gains, net in the condensed consolidated statements of income. As of September 30, 2017, the carrying value of the embedded derivative is $135 million (December 31, 2016 - $100 million).

For the three and nine months ended September 30, 2017, the partnership recognized interest income on the participating loan interests of $7 million (2016 - $8 million) and $21 million (2016 - $24 million), respectively, and fair value gains of $27 million (2016 - $2 million) and $57 million (2016 - $21 million), respectively.

Summarized financial information in respect of the properties underlying the partnership’s investment in participating loan interests is set out below:

(US$ Millions)
Sep. 30, 2017

Dec. 31, 2016

Non-current assets
$
1,956

$
1,589

Current assets
—

10

Total assets
1,956

1,599

Non-current liabilities
803

94

Current liabilities
—

478

Total liabilities
803

572

Net assets
$
1,153

$
1,027


 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2017

2016

2017

2016

Revenues
$
26

$
33

$
88

$
96

Expenses
15

15

45

46

Earnings before fair value gains, net
11

18

43

50

Fair value gains, net
69

8

125

41

Net earnings
$
80

$
26

$
168

$
91


NOTE 7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment primarily consists of hospitality assets such as Center Parcs UK, Paradise Island Holdings Limited (“Atlantis”), BREF HR, LLC (“Hard Rock Hotel and Casino”), Vintage Estates and a hotel at IFC Seoul. Hospitality assets are presented on a cost basis, net of accumulated fair value changes and accumulated depreciation. Accumulated fair value changes include unrealized revaluations of hospitality assets

15             

using the revaluation method, which are recorded in revaluation surplus as a component of equity, as well as unrealized impairment losses recorded in net income. The partnership depreciates these assets on a straight-line basis over their relevant estimated useful lives.

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

Hospitality assets by class
Useful life (in years)
Building and building improvements
7 to 50+
Land improvements
14 to 30
Furniture, fixtures and equipment
3 to 20

The following table presents the change to the components of the partnership’s property, plant and equipment for the nine months ended September 30, 2017 and for the year ended December 31, 2016:

(US$ Millions)
Sep. 30, 2017

Dec. 31, 2016

Cost:
 
 
Balance, beginning of period
$
5,417

$
4,969

Acquisitions through business combinations
—

650

Additions
168

248

Disposals
(51
)
(28
)
Foreign currency translation
215

(422
)
 
5,749

5,417

Accumulated fair value changes:
 
 
Balance, beginning of period
659

585

Increase from revaluation
—

74

 
659

659

Accumulated depreciation:
 
 
Balance, beginning of period
(719
)
(531
)
Depreciation
(193
)
(231
)
Disposals
20

22

Foreign currency translation
(5
)
21

 
(897
)
(719
)
Total property, plant and equipment
$
5,511

$
5,357


NOTE 8. GOODWILL
Goodwill of $1,055 million at September 30, 2017 (December 31, 2016 - $761 million) is primarily attributable to the investments in Center Parcs UK and IFC Seoul. The partnership performs a goodwill impairment test annually by assessing if the carrying value of the cash-generating unit, including the allocated goodwill, exceeds its recoverable amount determined as the greater of the estimated fair value less costs to sell or the value in use.

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

The trademark assets of Center Parcs UK had a carrying amount of $957 million as of September 30, 2017 (December 31, 2016 - $875 million). They have been determined to have an indefinite useful life as the partnership has the legal right to operate these trademarks exclusively in certain territories and in perpetuity. The business model of Center Parcs UK is not subject to technological obsolescence or commercial innovations in any material way.

In addition, intangible assets include the trademark and licensing assets acquired as part of the historical acquisitions of Atlantis and Hard Rock Hotel and Casino. At September 30, 2017, intangible assets with carrying values of $209 million (December 31, 2016 - $210 million) and $44 million (December 31, 2016 - $45 million), for Atlantis and Hard Rock Hotel and Casino respectively, were determined to have an indefinite useful life. These assets consisted primarily of trademark rights for these two properties granted under perpetual licenses. The business models of the Atlantis and Hard Rock Hotel and Casino are not subject to technological obsolescence or commercial innovations in any material way.


16             


Intangible assets by class
Useful life (in years)

Trademarks
Indefinite

Gaming rights
Indefinite

Water/ electricity rights
Indefinite

Management contracts
40

Customer relationships
9 to 10

Other
6 to 10


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

The following table presents the components of the partnership’s intangible assets as of September 30, 2017 and December 31, 2016:

(US$ Millions)
Sep. 30, 2017

Dec. 31, 2016

Cost
$
1,345

$
1,243

Accumulated amortization
(57
)
(54
)
Accumulated impairment losses
(48
)
(48
)
Balance, end of period
$
1,240

$
1,141


The following table presents a roll forward of the partnership’s intangible assets for the nine months ended September 30, 2017 and the year ended December 31, 2016:

(US$ Millions)
Sep. 30, 2017

Dec. 31, 2016

Balance, beginning of period
$
1,141

$
1,321

Acquisitions
32

12

Disposals(1)
—

(15
)
Amortization
(7
)
(9
)
Foreign currency translation
74

(168
)
Balance, end of period
$
1,240

$
1,141

(1) 
Includes the sale of the Hard Rock trademarks to a third party during the third quarter of 2016. At the date of the transaction, the carrying value of the trademarks was $15 million.

NOTE 10. OTHER NON-CURRENT ASSETS
The components of other non-current assets are as follows:
(US$ Millions)
Sep. 30, 2017

Dec. 31, 2016

Securities designated as FVTPL
$
170

$
37

Derivative assets
51

12

Securities designated as AFS
154

168

Restricted cash
124

104

Inventory
136

10

Other
149

169

Total other non-current assets
$
784

$
500


a)
Securities designated as FVTPL
In the first quarter of 2017, the partnership made an investment of $135 million in convertible preferred units of a U.S. hospitality operating company. The preferred units earn a fixed cumulative dividend of 7.5% per annum compounding quarterly. Additionally, the partnership receives distributions payable in additional convertible preferred units of the U.S. hospitality operating company at 5.0% per annum compounding quarterly.

b)
Securities designated as AFS
Securities designated as AFS represent the partnership’s retained equity interests in 1625 Eye Street in Washington, D.C. and Heritage Plaza in Houston, both property holding companies, that it previously controlled and in which it retained a non-controlling interest following disposition of these properties to third parties. The partnership continues to manage these properties on behalf of the acquirer but does not exercise significant influence over the relevant activities of the properties. Included in securities designated as AFS at September 30, 2017 are $107 million (December 31, 2016 - $106 million) of securities pledged as security for a loan payable to the issuer in the amount of $93 million (December 31, 2016 - $93 million) recognized in other non-current financial liabilities.


17             

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

(US$ Millions)
Sep. 30, 2017

Dec. 31, 2016

Derivative assets
$
987

$
1,338

Accounts receivable(1)
383

414

Restricted cash and deposits
268

313

Prepaid expenses
131

130

Other current assets
241

398

Total accounts receivable and other
$
2,010

$
2,593

(1) 
See Note 31, Related Parties, for further discussion.

Derivative assets
As of September 30, 2017, derivative assets with a carrying amount $987 million (December 31, 2016 - $1,338 million) include warrants to purchase shares of common stock of GGP measured at FVTPL. The fair value of the GGP warrants was $953 million (December 31, 2016 - $1,254 million) determined using a Black-Scholes option pricing model, assuming a 0.1 year term (December 31, 2016 - 0.9 year term), 91% volatility (December 31, 2016 - 69% volatility), and a risk free interest rate of 0.95% (December 31, 2016 - 0.75%).

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

The following is a summary of the assets and liabilities that were classified as held for sale as of September 30, 2017 and December 31, 2016:
(US$ Millions)
Sep. 30, 2017

Dec. 31, 2016

Investment properties
$
1,924

$
146

Equity accounted investments
8

—

Accounts receivable and other assets
194

1

Assets held for sale
2,126

147

Debt obligations
747

60

Accounts payable and other liabilities
153

1

Liabilities associated with assets held for sale
$
900

$
61


The following table presents the change to the components of the assets held for sale for the nine months ended September 30, 2017 and the year ended December 31, 2016:

(US$ Millions)
Sep. 30, 2017

Dec. 31, 2016

Balance, beginning of period
147

805

Reclassification to/(from) assets held for sale, net
3,460

3,316

Disposals
(1,514
)
(4,033
)
Fair value adjustments
15

79

Foreign currency translation
27

(18
)
Other
(9
)
(2
)
Balance, end of period
$
2,126

$
147


At December 31, 2016, assets held for sale included two industrial assets in France, a portfolio of multifamily assets in the United States and seven triple net lease assets in the United States. In the first quarter of 2017, the portfolio of multifamily assets was sold for approximately $73 million. One industrial and three triple net lease assets were subsequently reclassified back to operating assets. The triple net lease assets were sold during the year ended September 30, 2017 for approximately $55 million.

At September 30, 2017, assets held for sale included the industrial portfolio in Europe and nine assets within the opportunistic fund investment portfolios, as the partnership intend to sell controlling interests in these properties to third parties in the next 12 months.


18             

NOTE 13. DEBT OBLIGATIONS
The partnership’s debt obligations include the following:
 
Sep. 30, 2017
Dec. 31, 2016
(US$ Millions)
Weighted-average rate

Debt balance

Weighted-average rate

Debt balance

Unsecured facilities:
 
 
 
 
Brookfield Property Partners’ credit facilities
2.93
%
$
1,562

2.47
%
$
1,156

Brookfield Office Properties’ revolving facility
2.34
%
843

1.81
%
699

Brookfield Office Properties’ senior unsecured notes
4.00
%
120

4.17
%
261

Brookfield Canada Office Properties revolving facility
2.76
%
278

2.36
%
45

BPY BOPC LP credit facility
2.80
%
213

—

—

Subsidiary borrowings
4.22
%
603

4.06
%
467

 
 
 
 
 
Secured debt obligations:
 
 
 
 
Funds subscription credit facilities
2.57
%
153

2.17
%
836

Fixed rate
4.48
%
18,386

5.06
%
16,652

Variable rate
4.22
%
15,796

4.31
%
13,692

Deferred financing costs
 
(295
)
 
(229
)
Total debt obligations
 
$
37,659

 
$
33,579

 
 
 
 
 
Current
 
4,646

 
5,096

Non-current
 
32,266

 
28,423

Debt associated with assets held for sale
 
747

 
60

Total debt obligations
 
$
37,659

 
$
33,579


Debt obligations include foreign currency denominated debt in the functional currencies of the borrowing subsidiaries. Debt obligations by currency are as follows:
 
Sep. 30, 2017
Dec. 31, 2016
(Millions)
U.S. Dollars

Local
currency

U.S. Dollars

Local
currency

U.S. Dollars
$
25,947

$
25,947

$
23,349

$
23,349

British Pounds
4,268

£
3,185

3,817

£
3,089

Canadian Dollars
2,960

C$
3,691

2,425

C$
3,260

Australian Dollars
1,565

A$
1,997

1,332

A$
1,851

South Korean Won
1,575

₩
1,805,000

1,325

₩
1,600,193

Brazilian Reais
513

R$
1,625

637

R$
2,078

Indian Rupee
628

₨
41,059

521

₨
35,434

Euros
498

€
422

402

€
382

Deferred financing costs
(295
)
 
(229
)
 
Total debt obligations
$
37,659

 
$
33,579

 


19             

NOTE 14. CAPITAL SECURITIES
The partnership has the following capital securities outstanding as of September 30, 2017 and December 31, 2016:

(US$ Millions)
Shares outstanding

Cumulative dividend rate

Sep. 30, 2017

Dec. 31, 2016

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

6.25
%
$
549

$
541

Series 2
24,000,000

6.50
%
528

522

Series 3
24,000,000

6.75
%
515

511

Brookfield BPY Holdings Inc. Junior Preferred Shares:
 
 
 
 
Class B Junior Preferred Shares
30,000,000

5.75
%
750

750

Class C Junior Preferred Shares
20,000,000

6.75
%
500

500

Brookfield Office Properties Inc. (“BPO”) Class AAA Preferred Shares:
 
 
 
 
Series G(1)
—

5.25
%
—

81

Series J(1)
—

5.00
%
—

123

Series K(1)
—

5.20
%
—

93

BPO Class B Preferred Shares:
 
 
 
 
Series 1(2)
3,600,000

70% of bank prime

—

—

Series 2(2)
3,000,000

70% of bank prime

—

—

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

5.25
%
23

24

Series 2
699,165

5.75
%
14

13

Series 3
909,994

5.00
%
17

17

Series 4
940,486

5.20
%
19

19

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

9.00
%
249

—

Rouse Series A Preferred Shares
5,600,000

5.00
%
144

143

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

5.00
%
40

40

Capital Securities – Fund Subsidiaries
 
 
816

794

Total capital securities
 
 
$
4,164

$
4,171

 
 
 
 
 
Current
 
 
78

370

Non-current
 
 
4,086

3,801

Total capital securities
 
 
$
4,164

$
4,171

(1) 
As of September 30, 2017, BPO had redeemed all of its 4,239,857 shares of Series G, 7,592,443 shares of Series J and 6,000,000 shares of Series K Class AAA preferred shares of BPO for $25.00, C$25.00 and C$25.00 plus accrued and unpaid dividends, respectively, outstanding as of December 31, 2016. The partnership held 1,003,549, 1,000,000 and 1,004,586 shares of the Series G, J and K shares, respectively, prior to redemption during the period ended September 30, 2017.
(2)  
BPO Class B Preferred Shares, Series 1 and 2 capital securities - corporate are owned by Brookfield Asset Management. BPO has an offsetting loan receivable against these securities earning interest at 95% of bank prime.

Cumulative preferred dividends on the BOP Split Senior Preferred Shares are payable quarterly, as and when declared by the Board of Directors of BOP Split. On October 18, 2017, the Boards of Directors of BOP Split declared quarterly dividends payable for the BOP Split Senior Preferred Shares.

Capital securities includes $249 million at September 30, 2017 (December 31, 2016 - nil) of preferred equity interests held by a third party investor in Manufactured Housing which have been classified as a liability, rather than as a non-controlling interest, due to the fact the holders are only entitled to distributions equal to their capital balance plus 9% annual return payable in monthly distributions until maturity in December 2025. The capital securities were issued to partially fund the acquisition of the Manufactured Housing portfolio during the first quarter of 2017.

Capital securities also includes $144 million at September 30, 2017 (December 31, 2016 - $143 million) of preferred equity interests held by a third party investor in Rouse Properties, L.P. which have been classified as a liability, rather than as a non-controlling interest, due to the fact that the interests are mandatorily redeemable on or after November 12, 2025 for a set price per unit plus any accrued but unpaid distributions; distributions are capped and accrue regardless of available cash generated.

Capital securities also includes $40 million at September 30, 2017 (December 31, 2016 - $40 million) of preferred equity interests held by the partnership’s co-investor in Vintage Estate which have been classified as a liability, rather than as non-controlling interest, due to the fact that the preferred equity interests are mandatorily redeemable on April 26, 2023 for cash at an amount equal to the outstanding principal balance of the preferred equity plus any accrued but unpaid dividend.

The Capital Securities – Fund Subsidiaries includes $775 million at September 30, 2017 (December 31, 2016 - $753 million) of equity interests in Brookfield DTLA Holdings LLC (“DTLA”) held by co-investors in the fund which have been classified as a liability, rather than as non-controlling interest, as holders of these interests can cause DTLA to redeem their interests in the fund for cash equivalent to the fair value of the interests on October 15, 2023, and on every fifth anniversary thereafter. Capital Securities – Fund Subsidiaries are measured at redemption amount.


20             

Capital Securities – Fund Subsidiaries also includes $41 million at September 30, 2017 (December 31, 2016 - $41 million) which represents the equity interests held by the partnership’s co-investor in the D.C. Fund which have been classified as a liability, rather than as non-controlling interest, due to the fact that on June 18, 2023, and on every second anniversary thereafter, the holders of these interests can redeem their interests in the D.C. Fund for cash equivalent to the fair value of the interests.

At September 30, 2017, capital securities includes $51 million (December 31, 2016 - $264 million) repayable in Canadian Dollars of C$64 million (December 31, 2016 - C$355 million).

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

The components of income tax expense include the following:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2017

2016

2017

2016

Current income tax
$
3

$
53

$
105

$
99

Deferred income tax
180

(1,014
)
314

(832
)
Income tax expense (benefit)
$
183

$
(961
)
$
419

$
(733
)

The partnership’s income tax expense increased for the three months ended September 30, 2017 and increased for the nine months ended September 30, 2017 as compared to the same periods in the prior year. The primary reason for the increase to the three month period is due to reorganization of the partnership’s interests in 2016 which lowered the tax rate applicable to certain subsidiaries. The increase to the tax expense for the nine months ended September 30, 2017, is primarily due to applying a higher future tax rate in the current year to certain of the partnership’s assets, in addition to the prior year tax impact of the reorganization in 2016 which lowered the tax rate applicable to certain subsidiaries.

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

(US$ Millions)
Sep. 30, 2017

Dec. 31, 2016

Accounts payable and accrued liabilities
$
702

$
751

Derivative liabilities
226

22

Provisions
216

231

Deferred revenue
3

7

Total other non-current liabilities
$
1,147

$
1,011


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

(US$ Millions)
Sep. 30, 2017

Dec. 31, 2016

Accounts payable and accrued liabilities
$
1,465

$
1,810

Deferred revenue
247

195

Loans and notes payable
797

500

Derivative liabilities
448

242

Other liabilities
7

2

Total accounts payable and other liabilities
$
2,964

$
2,749


At September 30, 2017, loans and notes payable includes $400 million (December 31, 2016 - $500 million) of on-demand deposits from Brookfield Asset Management to the partnership. See Note 31, Related Parties, for further information.

NOTE 18. EQUITY
The partnership’s capital structure is comprised of five classes of partnership units: GP Units, LP Units, redeemable/exchangeable partnership units of the Operating Partnership (“Redeemable/Exchangeable Partnership Units”), special limited partnership units of the Operating Partnership (“Special LP Units”) and limited partnership units of Brookfield Office Properties Exchange LP (“Exchange LP Units”).

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

LP Units entitle the holder to their proportionate share of distributions and are listed and publicly traded on the NYSE and the TSX. Each LP Unit entitles the holder thereof to one vote for the purposes of any approval at a meeting of limited partners, provided that holders of the Redeemable/

21             

Exchangeable Partnership Units that are exchanged for LP Units will only be entitled to a maximum number of votes in respect of the Redeemable/Exchangeable Partnership Units equal to 49% of the total voting power of all outstanding units.

The following table presents changes to the GP Units and LP Units from the beginning of the year:
 
General partnership units
Limited partnership units
(Thousands of units)
Sep. 30, 2017

Dec. 31, 2016

Sep. 30, 2017

Dec. 31, 2016

Outstanding, beginning of period
139

139

260,222

261,486

Exchange LP Units exchanged
—

—

262

1,016

Distribution Reinvestment Program
—

—

136

205

Issued under unit-based compensation plan
—

—

183

278

Repurchase of LP Units
—

—

(5,914
)
(2,763
)
Outstanding, end of period
139

139

254,889

260,222


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

Redeemable/Exchangeable Partnership Units
There were 432,649,105 Redeemable/Exchangeable Partnership Units outstanding at September 30, 2017 and December 31, 2016.

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

There were 4,759,997 Special LP Units outstanding at September 30, 2017 and December 31, 2016.

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

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

 
Limited Partnership Units of Brookfield Office Properties Exchange LP
(Thousands of units)
Sep. 30, 2017

Dec. 31, 2016

Outstanding, beginning of period
11,363

12,379

Exchange LP Units exchanged(1)
(262
)
(1,016
)
Outstanding, end of period
11,101

11,363

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

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

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions, except per unit information)
2017

2016

2017

2016

General Partner
$
—

$
—

$
—

$
—

Limited Partners
75

74

226

220

Holders of:
 
 
 
 
Redeemable/exchangeable partnership units
128

121

383

364

Special limited partnership units
1

1

4

4

Limited partnership units of Exchange LP
3

3

10

10

Total
$
207

$
199

$
623

$
598

Per unit(1)
$
0.295

$
0.280

$
0.885

$
0.840

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

22             


e)
Earnings per unit
The partnership’s net income per LP Unit and weighted average units outstanding are calculated as follows:
 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions, except unit information)
2017

2016

2017

2016

Net income attributable to limited partners
$
61

$
462

$
88

$
683

Income reallocation related to mandatorily convertible preferred shares
10

71

13

105

Net income attributable to limited partners – basic
71

533

101

788

Dilutive effect of conversion of preferred shares and options(1)
—

32

1

60

Net income attributable to limited partners – diluted
$
71

$
565

$
102

$
848

 
 
 
 
 
(in millions of units/shares)
 
 
 
 
Weighted average number of LP Units outstanding
255.3

261.8

256.4

261.7

Mandatorily convertible preferred shares
70.0

70.1

70.0

70.0

Weighted average number of LP Units - basic
325.3

331.9

326.4

331.7

Dilutive effect of the conversion of preferred shares and options(1)
0.4

30.5

0.8

35.9

Weighted average number of LP units outstanding - diluted
325.7

362.4

327.2

367.6

(1)  
The effect of the conversion of capital securities, which would have resulted in 17.1 million and 24.8 million potential LP Units for the three and nine months ended September 30, 2017, respectively, would have been anti-dilutive and is therefore excluded from the weighted average number of LP Units outstanding for the purposes of diluted net income per LP Unit for the three and nine months ended September 30, 2017.

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

(US$ Millions)
Sep. 30, 2017

Dec. 31, 2016

Redeemable/Exchangeable and special limited partnership units
$
14,487

$
14,523

Limited partnership units of Brookfield Office Properties Exchange L.P.
286

293

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

15

Preferred equity of subsidiaries
2,219

1,816

Non-controlling interests in subsidiaries and properties
10,551

9,972

Total interests of others in operating subsidiaries and properties
12,785

11,803

Total non-controlling interests
$
27,558

$
26,619


23             

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

 
 
Proportion of economic interests held by non-controlling interests
 
 
(US$ Millions)
Jurisdiction of formation
Sep. 30, 2017
Dec. 31, 2016
Sep. 30, 2017

Dec. 31, 2016

BPO(1)
Canada
—%
—%
$
2,725

$
2,663

Center Parcs UK
United Kingdom
73%
73%
872

982

BSREP CARS Sub-Pooling LLC(2)
United States
71%
71%
914

1,208

BSREP Industrial Pooling Subsidiary L.P.(2)
United States
70%
70%
862

887

BSREP II Korea Office Holdings Pte. Ltd.
South Korea
78%
78%
658

638

BSREP II Aries Pooling LLC(2)
United States
74%
74%
607

635

BSREP II BPY Rouse JV LLC(2)
United States
50%
50%
639

545

BSREP II RH B LLC(2)(3)
United States
74%
—%
543

—

BSREP UA Holdings LLC(2)
Cayman Islands
70%
70%
480

469

BREF ONE, LLC
United States
67%
67%
476

491

Brookfield Strategic Real Estate Partners II Storage REIT LLC(2)
United States
74%
74%
530

479

BSREP Europe Holdings L.P.(2)
Cayman Islands
66%
66%
697

447

BSREP II Brazil Pooling LLC
United States
68%
68%
459

423

Brookfield Brazil Retail Fundo de Investimento em Participações(4)
Brazil
—%
54%
—

412

BSREP India Office Holdings Pte. Ltd.
United States
67%
67%
394

316

Other
Various
18% - 88%
18% - 88%
1,929

1,208

Total
 
 
 
$
12,785

$
11,803

(1) 
Includes non-controlling interests in BPO subsidiaries which vary from 1% - 100%.
(2) 
Includes subsidiary-level non-controlling interests.
(3) 
Includes non-controlling interests in recently acquired manufactured housing portfolio. See Note 3, Business Acquisitions and Combinations for further information.
(4) 
The partnership entered into an amended management agreement with its co-investors in Brazil Retail resulting in the loss of control over the venture. Subsequent to entering into this agreement, the partnership will recognize its interest in Brazil Retail as an equity accounted investment. See Note 5, Equity Accounted Investments for further information.

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

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2017

2016

2017

2016

Base rent
$
933

$
823

$
2,727

$
2,339

Straight-line rent
36

46

94

116

Lease termination
5

5

13

11

Other
92

72

277

166

Total commercial property revenue
$
1,066

$
946

$
3,111

$
2,632


NOTE 21. INVESTMENT AND OTHER REVENUE
The components of investment and other revenue are as follows:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2017

2016

2017

2016

Investment income
$
4

$
21

$
144

$
26

Fee revenue
16

15

38

36

Dividend income
7

2

12

10

Participating loan notes
7

8

21

24

Interest and other income
—

10

17

46

Total investment and other revenue
$
34

$
56

$
232

$
142



24             

NOTE 22. DIRECT COMMERCIAL PROPERTY EXPENSE
The components of direct commercial property expense are as follows:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2017

2016

2017

2016

Property maintenance
$
181

$
191

$
523

$
508

Real estate taxes
118

116

351

320

Employee compensation and benefits
43

32

120

98

Ground rents
14

10

43

30

Other
63

18

164

52

Total direct commercial property expense
$
419

$
367

$
1,201

$
1,008


NOTE 23. DIRECT HOSPITALITY EXPENSE
The components of direct hospitality expense are as follows:
 
 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2017

2016

2017

2016

Employee compensation and benefits
$
69

$
70

$
217

$
215

Cost of food, beverage, and retail goods sold
61

59

177

182

Maintenance and utilities
30

29

94

78

Marketing and advertising
11

11

41

43

Other
78

85

259

265

Total direct hospitality expense
$
249

$
254

$
788

$
783


NOTE 24. DEPRECIATION AND AMORTIZATION
The components of depreciation and amortization expense are as follows:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2017

2016

2017

2016

Depreciation and amortization of real estate assets
$
61

$
55

$
177

$
170

Depreciation and amortization of non-real estate assets
8

8

24

18

Total depreciation and amortization
$
69

$
63

$
201

$
188


NOTE 25. GENERAL AND ADMINISTRATIVE EXPENSE
The components of general and administrative expense are as follows:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2017

2016

2017

2016

Employee compensation and benefits
$
47

$
47

$
149

$
127

Management fees
42

44

126

137

Transaction costs and other
58

55

179

151

Total general and administrative expense
$
147

$
146

$
454

$
415


NOTE 26. FAIR VALUE GAINS, NET
The components of fair value gains, net, are as follows:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2017

2016

2017

2016

Commercial properties
$
533

$
4

$
678

$
294

Commercial developments
90

25

194

158

Financial instruments and other(1)
(284
)
57

(155
)
257

Total fair values gains, net
$
339

$
86

$
717

$
709

(1)  
Includes bargain purchase gains from business acquisitions and combinations of $157 million (2016 - $28 million) for the nine months ended September 30, 2017 and 2016, respectively. See Note 3, Business Acquisitions and Combinations, for further information.


25             

NOTE 27. UNIT-BASED COMPENSATION
The partnership grants options to certain employees under its amended and restated BPY Unit Option Plan (“BPY Plan”). Pursuant to the BPY Plan, options may be settled for the in-the-money amount of the option in LP Units upon exercise. Consequently, options granted to employees under the BPY Plan are accounted for as an equity-based compensation agreement.

During the three and nine months ended September 30, 2017, the partnership incurred $4 million (2016 - $6 million) and $13 million (2016 - $14 million), respectively, of expense in connection with its unit-based compensation plans.

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

The partnership estimated the fair value of BPY Awards granted during the period using the Black-Scholes valuation model, with inputs to the model and resulting weighted average fair value per option as follows:

 
Unit of measure
Sep. 30, 2017
Exercise price
US$
22.92
Average term to exercise
In Years
7.50
Unit price volatility
%
25
Liquidity discount
%
25
Weighted average of expected annual dividend yield
%
6.50
Risk-free rate
%
2.37
Weighted average fair value per option
US$
1.60

i.
Equity-settled BPY Awards
The change in the number of options outstanding under the equity-settled BPY Awards at September 30, 2017 and December 31, 2016 is as follows:

 
Sep. 30, 2017
Dec. 31, 2016
 
Number of
options

Weighted average
exercise price

Number of
options

Weighted average
exercise price

Outstanding, beginning of period
16,338,511

$
20.49

17,349,629

$
20.53

Granted
93,750

22.92

3,020,931

19.51

Exercised
(1,075,110
)
19.17

(1,180,060
)
17.98

Expired/forfeited
(1,167,023
)
21.25

(2,851,989
)
19.69

Outstanding, end of period
14,190,128

$
20.55

16,338,511

$
20.49

Exercisable, end of period
7,526,299

$
20.21

5,501,679

$
19.90


The following table sets out details of options issued and outstanding at September 30, 2017 and December 31, 2016 under the equity-settled BPY Awards by expiry date:

 
Sep. 30, 2017
Dec. 31, 2016
Expiry date
Number of
options
Weighted average
exercise price

Number of
options

Weighted average
exercise price

2020
236,800
$
13.07

254,600

$
13.07

2021
266,400
17.44

316,100

17.44

2022
560,500
18.06

724,700

18.03

2023
724,120
16.80

948,980

16.80

2024
8,027,337
20.59

9,071,225

20.59

2025
1,867,040
25.18

2,153,923

25.18

2026
2,414,181
19.51

2,868,983

19.51

2027
93,750
22.92

—

—

Total
14,190,128
$
20.55

16,338,511

$
20.49


26             


ii.
Cash-settled BPY Awards
The change in the number of options outstanding under the cash-settled BPY Awards at September 30, 2017 and December 31, 2016 is as follows:

 
Sep. 30, 2017
Dec. 31, 2016
 
Number of options

Weighted average
exercise price

Number of options

Weighted average
exercise price

Outstanding, beginning of period
7,377,042

$
20.28

6,904,986

$
20.37

Granted
—

—

846,912

19.51

Exercised
(213,106)

19.12

(148,076)

18.55

Expired/forfeited
(12,573)

24.03

(226,780
)
21.32

Outstanding, end of period
7,151,363

$
20.31

7,377,042

$
20.28

Exercisable, end of period
3,923,890

$
19.95

2,772,207

$
19.75


The following table sets out details of options issued and outstanding at September 30, 2017 and December 31, 2016 under the cash-settled BPY Awards by expiry date:

 
Sep. 30, 2017
Dec. 31, 2016
Expiry date
Number of
options

Weighted average
exercise price

Number of
options

Weighted average
exercise price

2020
69,000

$
13.07

78,000

$
13.07

2021
172,800

17.44

186,800

17.44

2022
515,800

18.09

545,800

18.08

2023
519,000

16.80

549,000

16.80

2024
4,330,286

20.59

4,459,230

20.59

2025
701,868

25.18

711,300

25.18

2026
842,609

19.51

846,912

19.51

2027
—

—

—

—

Total
7,151,363

$
20.31

7,377,042

$
20.28


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

As of September 30, 2017, the total number of Restricted Units outstanding was 444,331 (December 31, 2016 - 327,636) with a weighted average exercise price of $21.08 (December 31, 2016 - $20.89).

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

As of September 30, 2017, the total number of Canadian Restricted Units outstanding was 21,624 (December 31, 2016 - 19,410) with a weighted average exercise price of C$22.88 (December 31, 2016 - C$22.14).

d)
Deferred Share Unit Plan
In addition to the above, BPO has a deferred share unit plan. At September 30, 2017, BPO has 1,458,958 deferred share units (December 31, 2016 - 1,402,373) outstanding and vested.


27             

NOTE 28. OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) consists of the following:
 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2017

2016

2017

2016

Items that may be reclassified to net income:
 
 
 
 
Foreign currency translation
 
 
 
 
Net unrealized foreign currency translation gains (losses) in respect of foreign operations
$
377

$
(128
)
$
1,035

$
(398
)
Reclassification of realized foreign currency translation losses (gains) to net income on disposition of foreign operations
50

—

50

—

(Losses) gains on hedges of net investments in foreign operations, net of income taxes for the three and nine months ended Sep. 30, 2017 of ($6) million and ($19) million, respectively (2016 – $3 million and ($2) million)(1)
(149
)
111

(512
)
330

 
278

(17
)
573

(68
)
Cash flow hedges
 
 
 
 
Gains (losses) on derivatives designated as cash flow hedges, net of income taxes for the three and nine months ended Sep. 30, 2017 of $6 million and $13 million, respectively (2016 – ($17) million and $28 million)
1

(20
)
40

(108
)
 
1

(20
)
40

(108
)
Available-for-sale securities
 
 
 
 
Net change in unrealized gains on available-for-sale securities, net of income taxes
(1
)
(3
)
—

(3
)
 
(1
)
(3
)
—

(3
)
Equity accounted investments
 
 
 
 
Share of unrealized foreign currency translation (losses) gains in respect of foreign operations
3

2

5

4

Gains (losses) on derivatives designated as cash flow hedges
2

—

3

(2
)
 
5

2

8

2

Items that will not be reclassified to net income:
 
 
 
 
Share of revaluation surplus on equity accounted investments

—

(1
)
—

(11
)
Net remeasurement (losses) on defined benefit obligations
—

—

(2
)
—

 
—

(1
)
(2
)
(11
)
Total other comprehensive income (loss)
$
283

$
(39
)
$
619

$
(188
)
(1) 
Unrealized gains (losses) on a number of hedges of net investments in foreign operations are with a related party.

NOTE 29. OBLIGATIONS, GUARANTEES, CONTINGENCIES AND OTHER
In the normal course of operations, the partnership and its consolidated entities execute agreements that provide for indemnification and guarantees to third parties in transactions such as business dispositions, business acquisitions, sales of assets and sales of services.
 
Certain of the partnership’s operating subsidiaries have also agreed to indemnify their directors and certain of their officers and employees. The nature of substantially all of the indemnification undertakings prevent the partnership from making a reasonable estimate of the maximum potential amount that it could be required to pay third parties as the agreements do not specify a maximum amount and the amounts are dependent upon the outcome of future contingent events, the nature and likelihood of which cannot be determined at this time. Historically, neither the partnership nor its consolidated subsidiaries have made significant payments under such indemnification agreements.
 
The partnership and its operating subsidiaries may be contingently liable with respect to litigation and claims that arise from time to time in the normal course of business or otherwise.

At September 30, 2017, the partnership has commitments totaling approximately $1,410 million for the development of Manhattan West in Midtown New York, Greenpoint Landing in Brooklyn, Studio Plaza in Dallas, Camarillo in California and 655 New York Avenue in Washington, D.C. as well as the redevelopment of One Allen Center, Two Allen Center and Three Allen Center in Houston, approximately £321 million for the development of London Wall Place, 100 Bishopsgate and Principal Place Residential in London and approximately AED 1.4 billion for the development of ICD Brookfield Place in Dubai.

During 2013, Brookfield Asset Management announced the final close on the $4.4 billion Brookfield Strategic Real Estate Partners (“BSREP”) fund, a global private fund focused on making opportunistic investments in commercial property. The partnership, as lead investor, committed approximately $1.3 billion to the fund. As of September 30, 2017, there remained approximately $170 million of uncontributed capital commitments.

In April 2016, Brookfield Asset Management announced the final close on the $9.0 billion second BSREP fund to which the partnership had committed $2.3 billion as lead investor. As of September 30, 2017, there remained approximately $960 million of uncontributed capital commitments.

28             


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

NOTE 30. FINANCIAL INSTRUMENTS
a)
Derivatives and hedging activities
The partnership and its operating entities use derivative and non-derivative instruments to manage financial risks, including interest rate, commodity, equity price and foreign exchange risks. The use of derivative contracts is governed by documented risk management policies and approved limits. The partnership does not use derivatives for speculative purposes. The partnership and its operating entities use the following derivative instruments to manage these risks:
 
•
foreign currency forward contracts and zero cost collars to hedge exposures to Canadian Dollar, Australian Dollar, British Pound, Euro, Chinese Yuan, Brazilian Real, Indian Rupee and South Korean Won denominated net investments in foreign subsidiaries and foreign currency denominated financial assets;
•
interest rate swaps to manage interest rate risk associated with planned refinancings and existing variable rate debt; and
•
interest rate caps to hedge interest rate risk on certain variable rate debt.
 
The partnership also designates Canadian Dollar financial liabilities of certain of its operating entities as hedges of its net investments in its Canadian operations.

Interest Rate Hedging
The following table provides the partnership’s outstanding derivatives that are designated as cash flow hedges of variability in interest rates associated with forecasted fixed rate financings and existing variable rate debt as of September 30, 2017 and December 31, 2016:

(US$ Millions)
Hedging item
Notional

Rates
Maturity dates
Fair value

Sep. 30, 2017
Interest rate caps of US$ LIBOR debt
$
2,918

2.8% - 5.8%
Dec. 2017 - Apr. 2020
$
—

 
Interest rate swaps of US$ LIBOR debt
2,759

0.7% - 2.2%
Jun. 2018 - May 2024
3

 
Interest rate caps of £ LIBOR debt
448

1.3%
Dec. 2019
—

 
Interest rate swaps of £ LIBOR debt
92

1.0% - 1.5%
Apr. 2020 - Jun. 2021
1

 
Interest rate swaps of € EURIBOR debt
42

0.7% - 1.4%
Oct. 2017 - Apr. 2021
(1
)
 
Interest rate swaps of C$ LIBOR debt
44

3.7%
Nov. 2021
1

 
Interest rate swaps on forecasted fixed rate debt
100

4.0%
Jun. 2029
(13
)
Dec. 31, 2016
Interest rate caps of US$ LIBOR debt
$
4,933

2.5% - 5.8%
Jan. 2017 - Jun. 2020
$
—

 
Interest rate swaps of US$ LIBOR debt
502

1.5% - 2.2%
Jun. 2018 - Nov. 2020
(6
)
 
Interest rate caps of £ LIBOR debt
37

2.5%
Aug. 2017
—

 
Interest rate swaps of £ LIBOR debt
85

1.0% - 1.5%
Apr. 2020 - Jun. 2021
2

 
Interest rate swaps of € EURIBOR debt
146

0.3% - 1.4%
Oct. 2017 - Apr. 2021
(4
)
 
Interest rate swaps of C$ LIBOR debt
44

3.7%
Nov. 2021
—

 
Interest rate swaps of A$ BBSW/BBSY debt
65

1.9%
Jul. 2017
(1
)
 
Interest rate swaps on forecasted fixed rate debt
300

3.7% - 4.0%
Jun. 2027 - Jun. 2029
(34
)

For the three and nine months ended September 30, 2017, the amount of hedge ineffectiveness recorded in earnings in connection with the partnership’s interest rate hedging activities was $11 million and $13 million (2016 - $35 million and $24 million), respectively.

29             

Foreign Currency Hedging
The following table provides the partnership’s outstanding derivatives that are designated as hedges of net investments in foreign subsidiaries or foreign currency cash flow hedges as of September 30, 2017 and December 31, 2016:

(US$ Millions)
Hedging item
 
Notional

Rates
Maturity dates
Fair value

Sep. 30, 2017
Net investment hedges
€
494

€0.83/$ - €0.94/$
Nov. 2017 - Dec. 2018
$
(31
)
 
Net investment hedges
£
3,386

£0.73/$ - £0.81/$
Oct. 2017 - Nov. 2018
(311
)
 
Net investment hedges
A$
2,024

A$1.26/$ - A$1.38/$
Oct. 2017 - Nov. 2018
(37
)
 
Net investment hedges
C¥
1,148

C¥6.86/$ - C¥7.20/$
Nov. 2017 - Jul. 2018
(9
)
 
Net investment hedges
₩
486,289

₩1,127.10/$ - ₩1,181.45/$
Oct. 2017 - Sep. 2018
(2
)
 
Net investment hedges
C$
38

C$1.26/$ - C$1.36/$
Oct. 2017 - Dec. 2017
(2
)
 
Cash flow hedges
Rs
12,000

Rs66.14/$ - Rs66.36/$
Dec. 2017
1

Dec. 31, 2016
Net investment hedges
€
600

€0.87/$ - €0.94/$
Feb. 2017 - Feb. 2018
$
8

 
Net investment hedges
£
3,664

£0.68/$ - £0.82/$
Jan. 2017 - Jan. 2018
(18
)
 
Net investment hedges
A$
1,967

A$1.32/$ - A$1.41/$
Jan. 2017 - Dec. 2017
36

 
Net investment hedges
C¥
1,750

C¥6.77/$ - C¥7.20/$
Feb. 2017 - Dec. 2017
7

 
Net investment hedges
R$
—

R$3.27/$ - R$3.83/$
Jan. 2017 - Feb. 2017
(9
)
 
Cash flow hedges
R$
500

R$3.35/$
Mar. 2017
1

 
Net investment hedges
₩
585,600

₩1,135.30/$ - ₩1,167.90/$
Sep. 2017 - Dec. 2017
22

 
Cash flow hedges
Rs
12,500

Rs67.84/$ - Rs70.60/$
Feb. 2017 - Sep. 2017
1


In addition, as of September 30, 2017, the partnership had designated nil (December 31, 2016 - C$690 million) of Canadian Dollar financial liabilities as hedges against the partnership’s net investment in Canadian operations.

For the three and nine months ended September 30, 2017 and 2016, the amount of hedge ineffectiveness recorded in earnings in connection with the partnership’s foreign currency hedging activities was not significant.

Other Derivatives
The following table presents details of the partnership’s other derivatives that have been entered into to manage financial risks as of September 30, 2017 and December 31, 2016:

(US$ Millions)
Derivative type
Notional

Maturity
dates

Rates
Fair value

Sep. 30, 2017
Interest rate swaps on forecasted fixed rate debt
$
1,660

Nov. 2027 -Dec. 2029
1.9.% - 6.0%
$
(82
)
 
Interest rate caps
2,428

May 2018 - Apr. 2020
2.5% - 5.8%
—

 
Interest rate swaps of US$ debt
1,050

Sep. 2018 - Nov. 2020
1.6%
3

 
Interest rate swaps of € EURIBOR debt
123

Sep. 2018 - Oct. 2019
0.3% - 1.4%
(2
)
Dec. 31, 2016
Interest rate swaps on forecasted fixed rate debt
$
1,460

Jun. 2018 - Nov. 2028
1.9% - 6.0%
$
(172
)
 
Interest rate caps
350

Jul. 2017
3.25%
—


As of September 30, 2017, the partnership recognized fair value losses, net of approximately $33 million related to the settlement of certain forward starting interest rate swaps that have not been designated as hedges.

As of September 30, 2017, the partnership have swaptions with a notional amount of $685 million (December 31, 2016 - 1,660 million), with a 1.00% rate and maturity dates from June 2018 to November 2018. The fair value of these derivatives as of September 30, 2017 was nil.

The other derivatives have not been designated as hedges for accounting purposes.

30             


b)
Measurement and classification of financial instruments

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

 
 
 
Sep. 30, 2017
Dec. 31, 2016
(US$ Millions)
Classification
Measurement basis
Carrying value

Fair value

Carrying value

Fair value

Financial assets
 
 
 
 
 
 
Participating loan interests
Loans and receivables
Amortized cost
$
510

$
510

$
471

$
471

Loans and notes receivable
Loans and receivables
Amortized cost
180

180

73

73

Other non-current assets
 
 
 
 
 
 
Securities designated as FVTPL
FVTPL
Fair value
170

170

37

37

Derivative assets
FVTPL
Fair value
51

51

12

12

Securities designated as AFS
AFS
Fair value
154

154

168

168

Current assets
 
 
 
 
 
 
  Derivative assets
FVTPL
Fair value
987

987

1,338

1,338

Other receivables(1)
Loans and receivables
Amortized cost
2,204

2,204

1,256

1,256

Cash and cash equivalents
Loans and receivables
Amortized cost
1,398

1,398

1,456

1,456

Total financial assets
 
 
$
5,654

$
5,654

$
4,811

$
4,811

Financial liabilities
 
 
 
 
 
 
Debt obligations(2)
Other liabilities
Amortized cost
$
37,659

$
38,097

$
33,579

$
33,900

Capital securities
Other liabilities
Amortized cost
3,348

3,348

3,377

3,379

Capital securities - fund subsidiaries
Other liabilities
Amortized cost
816

816

794

794

Other non-current liabilities
 
 
 
 
 
 
Loan payable
FVTPL
Fair value
26

26

26

26

Other non-current financial liabilities
Other liabilities
Amortized cost(3)
1,147

1,147

985

985

Accounts payable and other liabilities(4)
Other liabilities
Amortized cost(5)
3,117

3,117

2,750

2,750

Total financial liabilities
 
 
$
46,113

$
46,551

$
41,511

$
41,834

(1) 
Includes other receivables associated with assets classified as held for sale on the condensed consolidated balance sheet in the amount of $194 million and $1 million as of September 30, 2017 and December 31, 2016, respectively.
(2) 
Includes debt obligations associated with assets classified as held for sale on the condensed consolidated balance sheet in the amount of $747 million and $60 million as of September 30, 2017 and December 31, 2016, respectively.
(3) 
Includes derivative liabilities measured at fair value of approximately $226 million and $22 million as of September 30, 2017 and December 31, 2016, respectively.
(4) 
Includes accounts payable and other liabilities associated with assets classified as held for sale on the condensed consolidated balance sheet in the amount of $153 million and $1 million as of September 30, 2017 and December 31, 2016, respectively.
(5) 
Includes derivative liabilities measured at fair value of approximately $448 million and $242 million as of September 30, 2017 and December 31, 2016, respectively.

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

31             

The following table outlines financial assets and liabilities measured at fair value in the consolidated financial statements and the level of the inputs used to determine those fair values in the context of the hierarchy as defined above:
 
Sep. 30, 2017
Dec. 31, 2016
 (US$ Millions)
 Level 1
Level 2
Level 3
 Total
 Level 1
Level 2
Level 3
 Total
Financial assets
 
 
 
 
 
 
 
 
Participating loan interests – embedded derivative
$
—

$
—

$
135

$
135

$
—

$
—

$
100

$
100

Securities designated as FVTPL
—

—

170

170

—

—

37

37

Securities designated as AFS
—

—

154

154

—

—

168

168

Derivative assets
—

85

953

1,038

—

96

1,254

1,350

Total financial assets
$
—

$
85

$
1,412

$
1,497

$
—

$
96

$
1,559

$
1,655

 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
Accounts payable and other liabilities
$
—

$
674

$
—

$
674

$
—

$
264

$
—

$
264

Loan payable
—

—

26

26

—

—

26

26

Total financial liabilities
$
—

$
674

$
26

$
700

$
—

$
264

$
26

$
290


There were no transfers between levels during the three and nine months ended September 30, 2017 and the year ended December 31, 2016.

The following table presents the change in the balance of financial assets and financial liabilities accounted for at fair value categorized as Level 3 as of September 30, 2017 and December 31, 2016:

 
Sep. 30, 2017
Dec. 31, 2016

(US$ Millions)
Financial
assets
 
Financial
liabilities
 
Financial
assets
 
Financial
liabilities
 
Balance, beginning of period
$
1,559

$
26

$
1,664

$
26

Acquisitions
 
135

 
—

 
47

 
—

Dispositions
 
(14
)
 
—

 
(31
)
 
—

Fair value gains, net and OCI
 
(271
)
 
—

 
(121
)
 
—

Other
 
3

 
—

 
—

 
—

Balance, end of period
$
1,412

$
26

$
1,559

$
26


NOTE 31. RELATED PARTIES
In the normal course of operations, the partnership enters into transactions with related parties. These transactions have been measured at exchange value and are recognized in the consolidated financial statements. The immediate parent of the partnership is Brookfield Property Partners Limited. The ultimate parent of the partnership is Brookfield Asset Management. Other related parties of the partnership include Brookfield Asset Management’s subsidiaries and operating entities, certain joint ventures and associates accounted for under the equity method, as well as officers of such entities and their spouses.

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

The base management fee for the three and nine months ended September 30, 2017 was $26 million (2016 - $27 million) and $78 million (2016 - $79 million), respectively. The equity enhancement distribution for the three and nine months ended September 30, 2017 was $7 million (2016 - $4 million) and $20 million (2016 - $20 million), respectively.

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

32             

The following table summarizes transactions with related parties:
(US$ Millions)
Sep. 30, 2017

Dec. 31, 2016

Balances outstanding with related parties:
 
 
Participating loan interests
$
510

$
471

Net (payables)/receivables within equity accounted investments
(12
)
110

Loans and notes receivable(1)
95

46

Receivables and other assets
8

71

Deposit from Brookfield Asset Management
(400
)
(500
)
Property-specific debt obligations
(398
)
(323
)
Loans and notes payable and other liabilities
(447
)
(136
)
Capital securities held by Brookfield Asset Management
(1,250
)
(1,250
)
Preferred shares held by Brookfield Asset Management
(15
)
(15
)
(1) 
At September 30, 2017, includes $95 million (December 31, 2016 - $46 million) receivable from Brookfield Asset Management upon the earlier of the partnership’s exercise of its option to convert its participating loan interests into direct ownership of the Australian portfolio or the maturity of the participating loan interests.

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2017

2016

2017

2016

Transactions with related parties:
 
 
 
 
Commercial property revenue(1)
$
4

$
5

$
14

$
14

Management fee income
1

1

4

3

Interest income earned by equity accounted investments
1

1

3

3

Participating loan interests (including fair value gains, net)
33

10

77

45

Interest expense on debt obligations
3

7

21

26

Interest on capital securities held by Brookfield Asset Management
26

19

64

57

General and administrative expense(2)
51

57

151

201

Construction costs(3)
99

60

243

198

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

During the first quarter of 2017, the partnership and QIA each acquired a 25% interest in two multifamily developments from Canary Wharf for a combined consideration of £70 million, representing costs incurred to the date of sale plus the equity funding required to complete the developments.

During the first quarter of 2017, the partnership along with BPREP, acquired a 25% and 75% interest, respectively, of One Post Street, an office building in San Francisco, California for $245 million.

During the second quarter of 2017, the partnership redeemed all of the public units outstanding of Brookfield Canada Office Properties, for C$32.50 per unit, or C$516 million.

During the second quarter of 2017, the partnership redeemed all of the public units outstanding of Brookfield Prime Property Fund, for A$8.815 per unit, or A$85 million.

NOTE 32. SUBSIDIARY PUBLIC ISSUERS
BOP Split was incorporated for the purpose of being an issuer of preferred shares and owning the partnership’s additional investment in BPO common shares. Pursuant to the terms of a Plan of Arrangement, holders of outstanding BPO Class AAA Preferred Shares Series G, H, J and K, which were convertible into BPO common shares, were able to exchange their shares for BOP Split Senior Preferred Shares, subject to certain conditions. The BOP Split Senior Preferred shares are listed on the TSX and began trading on June 11, 2014. All shares issued by BOP Split are retractable by the holders at any time for cash.

In connection with an internal restructuring completed in July 2016, the partnership and certain of its related entities agreed to guarantee all of BPO’s Class AAA Preferred Shares and all of BPO’s debt securities issued pursuant to BPO’s indenture dated December 8, 2009.

33             

The following table provides consolidated summary financial information for the partnership, BOP Split, BPO, and the holding entities:

(US$ Millions)
For the three months ended Sep. 30, 2017
Brookfield Property Partners L.P.

BOP Split

BPO

Holding entities(2)

Additional holding entities and eliminations(3)

Consolidating
adjustments(4)

Brookfield Property Partners L.P consolidated

Revenue
$
—

$
—

$
34

$
116

$
—

$
1,360

$
1,510

Net income attributable to unitholders(1)
62

(79
)
(90
)
175

17

83

168

For the three months ended Sep. 30, 2016
 
 
 
 
 
 
 
Revenue
$
—

$
—

$
68

$
152

$
—

$
1,189

$
1,409

Net income attributable to unitholders(1)
470

25

62

1,255

—

(557
)
1,255

(1)
Includes net income attributable to LP Units, GP Units, Redeemable/Exchangeable Partnership Units, Special LP Units and Exchange LP Units.
(2)
Includes the operating partnership, Brookfield BPY Holdings Inc., Brookfield BPY Retail Holdings II Inc., BPY Bermuda Holdings Limited, and BPY Bermuda Holdings II Limited.
(3)
Includes BPY Bermuda Holdings IV Limited and BPY Bermuda Holdings V Limited, which serve as guarantors for BPO but not BOP Split, net of intercompany balances and transactions with other holding entities.
(4)
Includes elimination of intercompany transactions and balances necessary to present the partnership on a consolidated basis.

(US$ Millions)
For the nine months ended Sep. 30, 2017
Brookfield Property Partners L.P.

BOP Split

BPO

Holding entities(2)

Additional holding entities and eliminations(3)

Consolidating
adjustments(4)

Brookfield Property Partners L.P consolidated

Revenue
$
—

$
—

$
178

$
445

$
—

$
3,934

$
4,557

Net income attributable to unitholders(1)
89

(294
)
(471
)
248

17

652

241

For the nine months ended Sep. 30, 2016
 
 
 
 
 
 
 
Revenue
$
—

$
—

$
131

$
312

$
—

$
3,546

$
3,989

Net income attributable to unitholders(1)
694

221

484

1,855

—

(1,399
)
$
1,855

(1)
Includes net income attributable to LP Units, GP Units, Redeemable/Exchangeable Partnership Units, Special LP Units and Exchange LP Units.
(2)
Includes the operating partnership, Brookfield BPY Holdings Inc., Brookfield BPY Retail Holdings II Inc., BPY Bermuda Holdings Limited, and BPY Bermuda Holdings II Limited.
(3)
Includes BPY Bermuda Holdings IV Limited and BPY Bermuda Holdings V Limited, which serve as guarantors for BPO but not BOP Split, net of intercompany balances and transactions with other holding entities.
(4)
Includes elimination of intercompany transactions and balances necessary to present the partnership on a consolidated basis.

(US$ Millions)
As of Sep. 30, 2017
Brookfield Property Partners L.P.

BOP Split

BPO

Holding entities(2)

Additional holding entities and eliminations(3)

Consolidating
adjustments(4)

Brookfield Property Partners L.P consolidated

Current assets
$
—

$
342

$
87

$
3,013

$
276

$
(307
)
$
3,411

Non-current assets
8,163

13,491

21,503

29,569

1,530

4,350

78,606

Assets held for sale
—

—

—

—

—

2,126

2,126

Current liabilities
—

871

5,682

4,122

3

(2,990
)
7,688

Non-current liabilities
—

4,583

1,761

6,295

1,881

26,085

40,605

Liabilities associated with assets held for sale
—

—

—

—

—

900

900

Equity attributable to interests of others in operating subsidiaries and properties
—

—

2,094

—

—

10,691

12,785

Equity attributable to unitholders(1)
$
8,163

$
8,379

$
12,053

$
22,165

$
(78
)
$
(28,517
)
$
22,165

(1) Includes equity attributable to LP Units, GP Units, Redeemable/Exchangeable Partnership Units, Special LP Units and Exchange LP Units.
(2)
Includes the operating partnership, Brookfield BPY Holdings Inc., Brookfield BPY Retail Holdings II Inc., BPY Bermuda Holdings Limited, and BPY Bermuda Holdings II Limited.
(3)
Includes BPY Bermuda Holdings IV Limited and BPY Bermuda Holdings V Limited, which serve as guarantors for BPO but not BOP Split, net of intercompany balances and transactions with other holding entities.
(4)
Includes elimination of intercompany transactions and balances necessary to present the partnership on a consolidated basis.

34             

(US$ Millions)
As of Dec. 31, 2016
Brookfield Property Partners L.P.

BOP Split

BPO

Holding entities(2)

Additional holding entities and eliminations(3)

Consolidating
adjustments(4)

Brookfield Property Partners L.P consolidated

Current assets
$
—

$
3

$
60

$
93

$
4

$
3,891

$
4,051

Non-current assets
8,371

5,320

22,393

31,259

(413
)
6,999

73,929

Assets held for sale
—

—

—

—

—

147

147

Current liabilities
—

3

401

480

348

6,983

8,215

Non-current liabilities
—

3,090

7,725

8,514

468

15,893

35,690

Liabilities associated with assets held for sale
—

—

—

—

—

61

61

Equity attributable to interests of others in operating subsidiaries and properties
—

—

1,692

—

—

10,111

11,803

Equity attributable to unitholders(1)
$
8,371

$
2,230

$
12,635

$
22,358

$
(1,225
)
$
(22,011
)
$
22,358

(1) Includes equity attributable to LP Units, GP Units, Redeemable/Exchangeable Partnership Units, Special LP Units and Exchange LP Units.
(2)
Includes the operating partnership, Brookfield BPY Holdings Inc., Brookfield BPY Retail Holdings II Inc., BPY Bermuda Holdings Limited, and BPY Bermuda Holdings II Limited.
(3)
Includes BPY Bermuda Holdings IV Limited and BPY Bermuda Holdings V Limited, which serve as guarantors for BPO but not BOP Split, net of intercompany balances and transactions with other holding entities.
(4)
Includes elimination of intercompany transactions and balances necessary to present the partnership on a consolidated basis.

NOTE 33. SEGMENT INFORMATION
a)
Operating segments
IFRS 8, Operating Segments, requires operating segments to be determined based on internal reports that are regularly reviewed by the chief operating decision maker (“CODM”) for the purpose of allocating resources to the segment and to assessing its performance. These segments are independently and regularly reviewed and managed by the Chief Executive Officer, who is considered the CODM.

b)
Basis of measurement
The CODM measures and evaluates the performance of the partnership’s operating segments based on funds from operations (“FFO”). This performance metric does not have a standardized meaning prescribed by IFRS and therefore may differ from similar metrics used by other companies and organizations. Management believes that while not an IFRS measure, FFO is the most consistent metric to measure the partnership’s financial statements and for the purpose of allocating resources and assessing its performance.

The partnership defines FFO as follows:

i.
net income, prior to fair value gains, net, depreciation and amortization of real estate assets, and income taxes less non-controlling interests of others in operating subsidiaries and properties share of these items. When determining FFO, the partnership also includes its proportionate share of the FFO of unconsolidated partnerships and joint ventures and associates.

c)
Reportable segment measures
The following summaries present certain financial information regarding the partnership’s operating segments for the three and nine months ended September 30, 2017 and 2016:

(US$ Millions)
Total revenue
FFO
Three months ended Sep. 30,
2017

2016

2017

2016

Core Office
$
536

$
555

$
113

$
142

Core Retail
—

—

113

95

Opportunistic
974

854

90

97

Corporate
—

—

(119
)
(125
)
Total
$
1,510

$
1,409

$
197

$
209


(US$ Millions)
Total revenue
FFO
Nine months ended Sep. 30,
2017

2016

2017

2016

Core Office
$
1,591

$
1,651

$
408

$
445

Core Retail
—

—

331

297

Opportunistic
2,966

2,338

239

262

Corporate
—

—

(352
)
(361
)
Total
$
4,557

$
3,989

$
626

$
643


35             


The following summary presents information about certain consolidated balance sheet items of the partnership, on a segmented basis, as of September 30, 2017 and December 31, 2016:

 

Total assets

Total liabilities
(US$ Millions)
Sep. 30, 2017

Dec. 31, 2016

Sep. 30, 2017

Dec. 31, 2016

Core Office
$
34,839

$
34,527

$
17,683

$
17,132

Core Retail
8,635

8,707

—

—

Opportunistic
40,183

34,518

24,898

20,435

Corporate
486

375

6,612

6,399

Total
$
84,143

$
78,127

$
49,193

$
43,966


The following summary presents a reconciliation of FFO to net income for the three and nine months ended September 30, 2017 and 2016:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2017

2016

2017

2016

FFO(1)
197

209

626

643

Depreciation and amortization of real estate assets
(62
)
(55
)
(177
)
(170
)
Fair value gains, net
339

86

717

709

Share of equity accounted income - non-FFO
182

230

248

208

Income tax expense
(183
)
961

(419
)
733

Non-controlling interests of others in operating subsidiaries and properties – non-FFO
(305
)
(176
)
(754
)
(268
)
Net income attributable to unitholders(2)
168

1,255

241

1,855

Non-controlling interests of others in operating subsidiaries and properties
491

361

1,269

770

Net income
$
659

$
1,616

$
1,510

$
2,625

(1)  
FFO represents interests attributable to GP Units, LP Units, Exchange LP Units, Redeemable/Exchangeable Partnership Units and Special LP Units. The interests attributable to Exchange LP Units, Redeemable/Exchangeable Partnership Units and Special LP Units are presented as non-controlling interests in the consolidated statements of income.
(2)  
Includes net income attributable to GP Units, LP Units, Exchange LP Units, Redeemable/Exchangeable Partnership Units and Special LP Units. The interests attributable to Exchange LP Units, Redeemable/Exchangeable Partnership Units and Special LP Units are presented as non-controlling interests in the consolidated statements of income.

NOTE 34. SUBSEQUENT EVENTS

On October 6, 2017, the partnership exercised all of its outstanding warrants of GGP. Of these warrants, 16 million were exercised on a cashless basis and the remaining 43 million warrants on a full share settlement basis for approximately $462 million. The exercise resulted in the partnership acquiring an additional 68 million common shares of GGP, increasing the partnership’s ownership from 29% to 34%.


36