EX-99.2 3 bpyex992q32018.htm EXHIBIT 99.2 Exhibit
Brookfield Property Partners L.P.

Condensed consolidated financial statements (unaudited)
As at September 30, 2018 and December 31, 2017 and
for the three and nine months ended September 30, 2018 and 2017

1             

Brookfield Property Partners L.P.
Condensed Consolidated Balance Sheets
Unaudited
 
 
As at
(US$ Millions)
Note
 
Sep. 30, 2018

Dec. 31, 2017

Assets
 
 
 
 
Non-current assets
 
 
 
 
Investment properties
5
 
$
73,957

$
51,357

Equity accounted investments
6
 
21,940

19,761

Participating loan interests
7
 
266

517

Property, plant and equipment
8
 
6,863

5,457

Goodwill
9
 
1,124

1,079

Intangible assets
10
 
1,214

1,188

Other non-current assets
11
 
1,143

898

Loans and notes receivable
 
 
446

178

Total non-current assets
 
 
106,953

80,435

Current assets
 
 
 
 
Loans and notes receivable
 
 
105

7

Accounts receivable and other
12
 
1,690

981

Cash and cash equivalents
 
 
2,444

1,491

Total current assets
 
 
4,239

2,479

Assets held for sale
13
 
391

1,433

Total assets
 
 
$
111,583

$
84,347

 
 
 
 
 
Liabilities and equity
 
 
 
 
Non-current liabilities
 
 
 
 
Debt obligations
14
 
$
49,909

$
30,749

Capital securities
15
 
2,900

2,839

Other non-current liabilities
17
 
1,519

918

Deferred tax liabilities
 
 
2,659

2,888

Total non-current liabilities
 
 
56,987

37,394

Current liabilities
 
 
 
 
Debt obligations
14
 
4,472

6,135

Capital securities
15
 
824

1,326

Accounts payable and other liabilities
18
 
3,394

3,052

Total current liabilities
 
 
8,690

10,513

Liabilities associated with assets held for sale
13
 
148

1,316

Total liabilities
 
 
65,825

49,223

 
 
 
 
 
Equity
 
 
 
 
Limited partners
19
 
11,212

7,395

General partner
19
 
4

6

Non-controlling interests attributable to:
 
 
 
 
Redeemable/exchangeable and special limited partnership units
19,20
 
12,683

14,500

Limited partnership units of Brookfield Office Properties Exchange LP
19,20
 
98

285

Class A shares of Brookfield Property REIT Inc. (“BPR”)
19,20
 
4,277

—

Interests of others in operating subsidiaries and properties
20
 
17,484

12,938

Total equity
 
 
45,758

35,124

Total liabilities and equity
 
 
$
111,583

$
84,347


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
2018

2017

2018

2017

Commercial property revenue
21
$
1,251

$
1,066

$
3,478

$
3,111

Hospitality revenue
22
502

410

1,460

1,214

Investment and other revenue
23
75

34

161

232

Total revenue
 
1,828

1,510

5,099

4,557

Direct commercial property expense
24
478

419

1,308

1,201

Direct hospitality expense
25
315

249

942

788

Investment and other expense
 
17

1

17

123

Interest expense
 
632

493

1,689

1,475

Depreciation and amortization
26
81

69

229

201

General and administrative expense
27
241

147

593

454

Total expenses
 
1,764

1,378

4,778

4,242

Fair value gains, net
28
556

339

1,943

717

Share of net earnings from equity accounted investments
6
65

371

581

897

Income before income taxes
 
685

842

2,845

1,929

Income tax (benefit) expense
16
(37
)
183

49

419

Net income
 
$
722

$
659

$
2,796

$
1,510

 
 
 
 
 
 
Net income attributable to:
 
 
 
 
 
Limited partners
 
$
144

$
61

$
532

$
88

General partner
 
—

—

—

—

Non-controlling interests attributable to:
 
 
 
 
 
Redeemable/exchangeable and special limited partnership units
 
206

104

857

149

Limited partnership units of Brookfield Office Properties Exchange LP
 
2

3

16

4

Class A shares of Brookfield Property REIT Inc.
 
28

—

39

—

Interests of others in operating subsidiaries and properties
 
342

491

1,352

1,269

Total
 
$
722

$
659

$
2,796

$
1,510

 
 
 
 
 
 
Net income per LP Unit:
 
 
 
 
 
Basic
19
$
0.44

$
0.22

$
1.79

$
0.31

Diluted
19
$
0.43

$
0.22

$
1.77

$
0.31


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
2018

2017

2018

2017

Net income
 
$
722

$
659

$
2,796

$
1,510

Other comprehensive income (loss)
30
 
 
 
 
Items that may be reclassified to net income:
 
 
 
 
 
Foreign currency translation
 
(189
)
278

(690
)
573

Cash flow hedges
 
9

1

62

40

Available-for-sale securities
 
—

(1
)
—

—

Equity accounted investments
 
8

5

29

8

Items that will not be reclassified to net income:
 
 
 
 
 
Securities - fair value through other comprehensive income ("FVTOCI")
 
(1
)
—

(5
)
—

Remeasurement of defined benefit obligations
 
—

—

2

(2
)
Revaluation surplus
 
1

—

3

—

Total other comprehensive income (loss)
 
(172
)
283

(599
)
619

Total comprehensive income (loss)
 
$
550

$
942

$
2,197

$
2,129

 
 
 
 
 
 
Comprehensive income attributable to:
 
 
 
 
 
Limited partners
 
 
 
 
 
Net income
 
$
144

$
61

$
532

$
88

Other comprehensive income (loss)
 
(37
)
77

(136
)
145

 
 
107

138

396

233

Non-controlling interests
 
 
 
 
 
Redeemable/exchangeable and special limited partnership units
 
 
 
 
 
Net income
 
206

104

857

149

Other comprehensive income (loss)
 
(49
)
131

(219
)
247

 
 
157

235

638

396

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

3

16

4

Other comprehensive income (loss)
 
—

3

(4
)
6

 
 
2

6

12

10

Class A shares of Brookfield Property REIT Inc.
 
 
 
 
 
Net income
 
28

—

39

—

Other comprehensive income (loss)
 
(10
)
—

(10
)
—

 
 
18

—

$
29

$
—

Interests of others in operating subsidiaries and properties
 
 
 
 
 
Net income
 
342

491

1,352

1,269

Other comprehensive income (loss)
 
(76
)
72

(230
)
221

 
 
266

563

1,122

1,490

Total comprehensive income
 
$
550

$
942

$
2,197

$
2,129


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
Ownership Changes
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
Class A shares of Brookfield Property REIT Inc.
Interests of others in operating subsidiaries and properties
Total equity
Balance as at Dec 31, 2017
$
5,613

$
1,878

$
140

$
(236
)
$
7,395

 
$
4

$
2

$
—

$
—

$
6

 
$
14,500

$
285

$
—

$
12,938

$
35,124

Net income
—

532

—

 
532

 
—

—

—

—

—

 
857

16

39

1,352

2,796

Other comprehensive income (loss)
—

—

—

(136
)
(136
)
 
—

—

—

—

—

 
(219
)
(4
)
(10
)
(230
)
(599
)
Total comprehensive income (loss)
—

532

—

(136
)
396

 
—

—

—

—

—

 
638

12

29

1,122

2,197

Distributions
—

(278
)
—

—

(278
)
 
—

—

—

—

—

 
(413
)
(8
)
(51
)
(794
)
(1,544
)
Issuance / repurchase of interests in operating subsidiaries
2,202

(1
)
112

—

2,313

 
—

—

—

—

—

 
63

1

3,386

4,218

9,981

Exchange of exchangeable units
156

—

19

(2
)
173

 
—

—

—

—

—

 
30

(203
)
—

—

—

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

—

2

—

308

 
—

—

 
—

—

 
3

—

(311
)
—

—

Change in relative interests of non-controlling interests
—

—

971

(66
)
905

 
—

—

(2
)
—

(2
)
 
(2,138
)
11

1,224

—

—

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

$
2,131

$
1,244

$
(440
)
$
11,212

 
$
4

$
2

$
(2
)
$
—

$
4

 
$
12,683

$
98

$
4,277

$
17,484

$
45,758

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 (loss)
—

—

—

145

145

 
—

—

—

—

—

 
247

6

—

221

619

Total comprehensive income (loss)
—

88

—

145

233

 
—

—

—

—

—

 
396

10

—

1,490

2,129

Distributions
—

(226
)
—

—

(226
)
 
—

—

—

—

—

 
(387
)
(10
)
—

(1,219
)
(1,842
)
Issuance / repurchase of interest 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


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
 
2018

2017

Operating activities
 
 
 
 
Net income
 
 
$
2,796

$
1,510

Share of equity accounted earnings, net of distributions
 
 
(219
)
(660
)
Fair value (gains), net
28
 
(1,943
)
(717
)
Deferred income tax expense
16
 
(57
)
314

Depreciation and amortization
26
 
229

201

Working capital and other
 
 
342

(261
)
 
 
 
1,148

387

Financing activities
 
 
 
 
Debt obligations, issuance
 
 
16,704

13,918

Debt obligations, repayments
 
 
(12,933
)
(11,355
)
Capital securities issued
 
 
—

249

Capital securities redeemed
 
 
(555
)
(297
)
Non-controlling interests, issued
 
 
1,643

1,719

Non-controlling interests, purchased
 
 
—

(483
)
Limited partnership units, issued
 
 
500

—

Limited partnership units, repurchased
 
 
(14
)
(136
)
Distributions to non-controlling interests in operating subsidiaries
 
 
(765
)
(1,198
)
Distributions to limited partnership unitholders
 
 
(278
)
(226
)
Distributions to redeemable/exchangeable and special limited partnership unitholders
 
 
(413
)
(387
)
Distributions to holders of Brookfield Office Properties Exchange LP units
 
 
(8
)
(10
)
Distributions to holders of Class A shares of Brookfield Property REIT Inc.
 
 
(51
)
—

 
 
 
3,830

1,794

Investing activities
 
 
 
 
Investment properties and subsidiaries, proceeds of dispositions
 
 
2,028

1,515

Property acquisitions and capital expenditures
 
 
(6,781
)
(3,739
)
Investment in equity accounted investments
 
 
(424
)
(471
)
Proceeds from sale and distributions of equity accounted investments and participating loan interests
 
 
571

891

Financial assets and other
 
 
(58
)
(262
)
Property, plant and equipment investments, net of dispositions
 
 
172

(187
)
Cash acquired in business combinations, net of cash impact from deconsolidation
 
 
563

(55
)
Restricted cash and deposits
 
 
(55
)
34

 
 
 
(3,984
)
(2,274
)
Cash and cash equivalents
 
 
 
 
Net change in cash and cash equivalents during the period
 
 
994

(93
)
Effect of exchange rate fluctuations on cash and cash equivalents held in foreign currencies
 
 
(41
)
35

Balance, beginning of period
 
 
1,491

1,456

Balance, end of period
 
 
$
2,444

$
1,398

 
 
 
 
 
Supplemental cash flow information
 
 
 
 
Cash paid for:
 
 
 
 
Income taxes
 
 
$
106

$
55

Interest (excluding dividends on capital securities)
 
 
$
1,449

$
1,150


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, 2018 is a 47% 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 Nasdaq Stock Market (“Nasdaq”) and the Toronto Stock Exchange (“TSX”) under the symbols “BPY” and “BPY.UN”, respectively.

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

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

These condensed consolidated financial statements as of and for the three and nine months ended September 30, 2018 were approved and authorized for issue by the Board of Directors of the partnership on October 31, 2018.
 
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, 2017, except for accounting standards adopted as identified in Note 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, 2017.

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

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

c)
Change in operating segments
IFRS 8, Operating Segments, requires operating segments to be determined based on internal reports that are regularly reviewed by the chief operating decision maker (“CODM”) for the purpose of allocating resources to the segment and to assessing its performance. On July 1, 2018, the partnership realigned its LP Investments segment (formerly referred to as Opportunistic) to include the corporate function of the Brookfield-sponsored real estate opportunity funds, previously included in the Corporate segment, to more closely align with the how the partnership now presents financial information to the CODM and investors. As of September 30, 2018, the partnership is organized into four reportable segments: i) Core Office, ii) Core Retail, iii) LP Investments and iv) Corporate. These segments are independently and regularly reviewed and managed by the Chief Executive Officer, who is considered the CODM. Segment disclosures for periods prior to the realignment of segments have been recast to reflect the changes in the partnership’s operating segments. See Note 35, Segment Information, for further discussion.

d)
Adoption of Accounting Standards
IFRS 15, Revenue from Contracts with Customers (“IFRS 15”)
The partnership adopted IFRS 15 effective January 1, 2018. IFRS 15 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 interpretations. IFRS 15 applies to nearly all contracts with customers: the main exceptions are leases, financial instruments and insurance contracts. The partnership’s revenue from leases are outside the scope of IFRS 15. The partnership’s material revenue streams subject to IFRS 15 are hospitality revenue and non-lease components within lease arrangements arising from the recovery of certain operating expenses from tenants. The adoption of IFRS 15 did not result in any material change to the pattern of revenue recognition by the partnership. The partnership adopted the standard using the modified retrospective approach with no restatement of comparatives and did not record any adjustment upon

7             


adoption. The partnership made additional disclosures in Note 20, Commercial Property Revenue, Note 21, Hospitality Revenue and Note 34, Segment Information, as a result of the adoption.
Following the adoption of IFRS 15, the partnership has separately disclosed other revenue from tenants in Note 20, Commercial Property Revenue, which consists of non-lease components within lease arrangements arising from the recovery of certain operating expenses from tenants which are accounted for in accordance with IFRS 15. Other revenue from tenants is recognized when the partnership has satisfied its performance obligation by delivering services as agreed upon in the lease agreements to tenants at an amount equal to the component of revenue allocated to such performance obligation.
The recognition pattern of hospitality revenue is not impacted upon adoption of IFRS 15. Room revenue is recognized net of taxes and levies. The partnership recognizes net wins from casino gaming activities, the difference between gaming wins and losses, as gaming revenue. Advance deposits from guests’ bookings of rooms and leisure activities are deferred and included as a liability until services are provided to guests. Similarly, the partnership recognizes a liability for deposits received from patrons before gaming activities occurs as well as for chips in patron’s possession. Revenue from accommodation is recognized over the period that the guest stays at the hotel; food and beverage revenue is recognized when goods and services are provided; and revenue from leisure activities is recognized when leisure activities are completed given the short duration.
The recognition pattern of fee revenue is not impacted upon adoption of IFRS 15. It is recognized over a period of time as the partnership satisfies its performance obligations as agreed upon in contracts with customers.
IFRS 9, Financial Instruments (“IFRS 9”)
The partnership adopted IFRS 9 effective January 1, 2018. IFRS 9 supersedes IAS 39, Financial Instruments: Recognition and Measurement (“IAS 39”). 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 partnership adopted IFRS 9 retrospectively with no restatement of comparatives. The adoption did not result in any material adjustment to the carrying amounts of financial assets, financial liabilities or opening retained earnings.
The following table presents the types of financial instruments held by the partnership within each financial instrument classification under IAS 39 and IFRS 9:
 
IAS 39
IFRS 9
 
Classification
Measurement
basis
Classification and measurement basis

Financial assets
 
 
 
Participating loan interests
Loans and receivables
Amortized cost
FVTPL
Loans and notes receivable
Loans and receivables
Amortized cost
Amortized cost
Other non-current assets
 
 
 
Securities designated as FVTPL
FVTPL
Fair value
FVTPL
Derivative assets
FVTPL
Fair value
FVTPL
Securities designated as AFS
AFS
Fair value
FVTOCI
Restricted cash
Loans and receivables
Amortized cost
Amortized cost
Accounts receivable and other
 
 
 
Derivative assets
FVTPL
Fair value
FVTPL
Other receivables
Loans and receivables
Amortized cost
Amortized cost
Cash and cash equivalents
Loans and receivables
Amortized cost
Amortized cost
Financial liabilities
 
 
 
Debt obligations
Other liabilities
Amortized cost
Amortized cost
Capital securities
Other liabilities
Amortized cost
Amortized cost
Capital securities - fund subsidiaries
Other liabilities
Fair value
FVTPL
Other non-current liabilities
 
 
 
Loan payable
FVTPL
Fair value
FVTPL
Other non-current financial liabilities
Other liabilities
Amortized cost
Amortized cost
Derivative liabilities
FVTPL
Fair value
FVTPL
Accounts payable and other liabilities
Other liabilities
Amortized cost
Amortized cost
For financial instruments measured at amortized cost, the partnership assesses if there have been significant increases in credit risk since initial recognition to determine whether lifetime or 12-month expected credit losses should be recognized. Any related loss allowances are recorded through profit or loss. The change in impairment policy did not have a material impact on the partnership’s financial statements.

8             


The adoption of IFRS 9 did not have any material impact to the partnership’s policy for hedge accounting applied to certain derivative instruments. The partnership’s accounting policy is outlined in Note 2, Summary of Significant Accounting Policies, of the consolidated financial statements for the year ended December 31, 2017.
e)
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, 2017 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, 2018.

f)
Future Accounting Policy
IFRS 16, Leases (“IFRS 16”)
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. IFRS 16 brings most leases on-balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. Lessor accounting, however, remains largely unchanged and the distinction between operating and finance leases is retained.
The partnership has participated in strategic planning sessions with its subsidiaries and associates and has developed and implemented an adoption project plan. Using the population of existing contractual arrangements, the partnership has substantially completed its identification of leases that are required to be capitalized under the new standard. The partnership is currently quantifying the present value of the identified lease contracts to determine the impact on the January 1, 2019 balance sheet and is assessing the expected impact to other financial statement line items once the standard has been adopted. The partnership is progressing as planned in its adoption project plan. Next steps include completing analysis on the transitional adjustment, assessing the impact to internal controls and drafting the additional disclosures required by the new standard.
The partnership currently anticipates adopting the standard using the modified retrospective approach, whereby any transitional impact is recorded in equity as of January 1, 2019 and comparative periods are not restated. The partnership intends to complete the transition using the current definition of a lease and expects to apply certain transition reliefs, practical expedients and policy choice options on adoption of the new standard.

The partnership will continue to evaluate the overall impact of IFRS 16 on its consolidated financial statements.

NOTE 3. ACQUISITION OF GGP INC.
On March 26, 2018, the partnership entered into a definitive merger agreement with GGP Inc. (“GGP”) to acquire all of the outstanding common shares of GGP other than those shares already held by the partnership and its subsidiaries. Under the terms of the agreement, GGP common shareholders had the right to elect, for each GGP share, to receive, subject to proration, (i) $23.50 in cash or (ii) either one BPY unit or one share of Class A stock, par value $0.01 per share, of BPR (“BPR Unit”), a new U.S. REIT security formed by recapitalizing GGP and amending its governing documents. Each BPR Unit is structured to provide an economic return equivalent to a LP Unit. The holder of a BPR Unit has the right, at any time, to request the share be redeemed for cash equivalent to the value of a LP Unit. In the event the holder of a BPR Unit exercises this right, the partnership has the right, at its sole discretion, to satisfy the redemption request with a LP Unit rather than cash.

On July 26, 2018, GGP shareholders approved the merger which closed on August 28, 2018. On closing the partnership controlled BPR as it held 87% of the voting stock of BPR through its 100% ownership of the BPR Class B and Class C shares. The balance of the voting rights in respect of BPR are held by the holders of the BPR Units.

Based on shareholder elections, which were subject to proration, cash totaling $9.05 billion was paid by GGP to its shareholders, other than the partnership, in the form of a pre-closing dividend on August 27, 2018. According to the terms of the agreement, the consideration payable on close of the merger was reduced by the amount of the pre-closing dividend. The pre-closing dividend was funded with new term debt, property-level refinancings, proceeds from the sale of partial interests in certain GGP properties and the issuance of non-controlling interests in subsidiaries of GGP.

The acquisition of GGP was accounted for as a business combination achieved in stages. The partnership’s existing equity interest in GGP was remeasured to fair value immediately prior to the acquisition date of August 28, 2018 based on the partnership’s interest in the fair value of the identifiable net assets and liabilities of GGP at the time. As a result of this remeasurement, a loss of approximately $580 million was recognized in fair value gains, net.

Consideration paid on acquisition of control by the partnership was comprised of the following:
•
88 million LP Units with a fair value of $1,786 million determined with reference to the trading price of the LP Units on the closing date;
•
161 million BPR Units with a fair value of $3,383 million determined with reference to the initial trading price of the BPR Unit;
•
Cash consideration of $200 million; and
•
Share-based payment awards to GGP employees with a fair value of $28 million.

As discussed in Note 19, Equity, the BPR Units issued on closing represent a non-controlling interest in the partnership.

As of September 30, 2018, the valuation of the investment properties, equity accounted investments, debt obligations, deferred tax liabilities, transaction costs, certain working capital balances and the acquisition date fair value of the partnership’s existing equity interest in GGP were still under evaluation by the partnership. Accordingly, the business combination has been accounted for on a provisional basis.

9             




The following table summarizes the provisional amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed in addition to the consideration paid and transaction costs incurred:

(US$ Millions)
GGP

Investment properties
$
17,991

Equity accounted investments
10,850

Property, plant and equipment
56

Accounts receivable and other
579

Cash and cash equivalents
423

Total assets
29,899

Less:
 
Debt obligations
(13,147
)
Accounts payable and other
(830
)
Deferred tax liabilities
(161
)
Non-controlling interests(1)
(1,938
)
Net assets acquired
$
13,823

Consideration(2)
$
13,166

Transaction costs
2

(1)
Includes non-controlling interests in a subsidiary of BPR measured as the proportionate share of the fair value of the assets, liabilities and contingent liabilities on the date of acquisition.
(2) 
Includes the acquisition date fair value of the partnership’s previously held equity interest in GGP of $7,770 million.

In connection with the acquisition of GGP, the partnership has recognized a bargain purchase gain of $657 million in fair value gains, net. The agreed transaction price and the fair value of the consideration transferred was less than the aggregate fair values of the individual assets acquired net of the liabilities assumed. The partnership determined the purchase price allocation, on a provisional basis, is complete and appropriately measured giving consideration to fact that the fair value of the investment properties acquired was determined based on transaction prices agreed with third parties for the sale of partial interests in certain of the GGP assets and valuation models prepared by an independent external appraiser.

In the period from August 28, 2018 to September 30, 2018, the partnership recorded revenue and net income in connection with this acquisition of approximately $129 million and $77 million, respectively. If the acquisition had occurred on January 1, 2018, the partnership’s total revenue and net income would have been $6,142 million and $3,413 million, respectively, for the nine months ended September 30, 2018.

NOTE 4. BUSINESS ACQUISITIONS AND COMBINATIONS
In addition to the acquisition of GGP, discussed in Note 3, Acquisition of GGP Inc., the partnership completed the following significant business combinations during 2018:
•
On February 1, 2018, the partnership acquired a portfolio of 105 extended-stay hotel properties across the United States (“Extended-Stay Hotel Portfolio”) for total consideration of $764 million.
•
On February 1, 2018, the partnership acquired a portfolio of 15 student housing properties in the United Kingdom (“UK Student Housing IV”), for total consideration of £527 million ($752 million).
•
On August 3, 2018, the partnership acquired a 100% leasehold interest in 666 Fifth Avenue, a commercial office asset in New York, for consideration of $1,252 million.

The partnership also completed several immaterial acquisitions during 2018 for total consideration of $3,056 million. The acquisitions were primarily LP Investments made by Brookfield-sponsored real estate funds to invest the fund capital. The partnership consolidates the acquired investments as Brookfield’s power as general partner, together with the partnership’s LP interests, provide the partnership with control over the investments.

10             

The following table summarizes the amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed in addition to the consideration and transaction costs incurred:
(US$ Millions)
Extended- Stay Hotel Portfolio

UK Student Housing IV

666 Fifth Avenue(3)

Other

Total

Date of acquisition
2/1/2018

2/1/2018

8/3/2018

Various

 
Investment properties
$
—

$
742

$
1,246

$
3,418

$
5,406

Property, plant and equipment
768

2

—

600

1,370

Goodwill
—

—

—

92

92

Intangible assets
—

—

—

54

54

Accounts receivable and other
7

53

10

542

612

Cash and cash equivalents
2

18

—

132

152

Total assets
777

815

1,256

4,838

7,686

Less:
 
 
 
 
 
Debt obligations
—

—

—

(1,163
)
(1,163
)
Accounts payable and other
(13
)
(63
)
(4
)
(283
)
(363
)
Deferred tax liabilities
—

—

—

(44
)
(44
)
Non-controlling interests(1)
—

—

—

(53
)
(53
)
Net assets acquired
$
764

$
752

$
1,252

$
3,295

$
6,063

Consideration(2)
$
764

$
752

$
1,252

$
3,056

$
5,824

Transaction costs
$
9

$
7

$
44

$
55

$
115

(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.
(3) 
The valuation of the investment property was still under evaluation by the partnership. Accordingly, this business combination has been accounted for on a provisional basis.

Excluding the acquisition of GGP, in the period from each acquisition date to September 30, 2018, the partnership recorded revenue and net income in connection with these acquisitions of approximately $308 million and $80 million, respectively. If the acquisitions had occurred on January 1, 2018, the partnership’s total revenue and net income would have been $5,279 million and $2,870 million, respectively, for the nine months ended September 30, 2018.

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

NOTE 5. 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, 2018 and the year ended December 31, 2017:

 
Nine months ended Sep. 30, 2018
Year ended Dec. 31, 2017
(US$ Millions)
Commercial properties

Commercial developments

Total

Commercial properties

Commercial developments

Total

Balance, beginning of period
$
48,780

$
2,577

$
51,357

$
45,699

$
3,085

$
48,784

Changes resulting from:
 
 
 
 
 
 
  Property acquisitions(1)
22,479

936

23,415

5,545

107

5,652

  Capital expenditures
614

837

1,451

905

990

1,895

Property dispositions(2)
(647
)
(3
)
(650
)
(1,240
)
(675
)
(1,915
)
Fair value gains, net
626

454

1,080

347

202

549

Foreign currency translation
(1,165
)
(98
)
(1,263
)
1,121

159

1,280

Transfer between commercial properties and commercial developments
688

(688
)
—

1,038

(1,038
)
—

Reclassifications to assets held for sale and other changes
(1,435
)
2

(1,433
)
(4,635
)
(253
)
(4,888
)
Balance, end of period
$
69,940

$
4,017

$
73,957

$
48,780

$
2,577

$
51,357

(1) 
Includes the commercial properties and developments from the GGP acquisition. See Note 3, Acquisition of GGP Inc. for further information.      
(2) 
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

11             

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 are internally determined and compared with market data, third-party reports and research as well as observable conditions. There are currently no known trends, events or uncertainties that the partnership reasonably believes could have a sufficiently pervasive impact across the partnership’s businesses to materially affect the methodologies or assumptions utilized to determine the estimated fair values reflected in these financial statements. Discount rates and capitalization rates are inherently uncertain and may be impacted by, among other things, movements in interest rates in the geographies and markets in which the assets are located. Changes in estimates of discount and capitalization rates across different geographies and markets are often independent of each other and not necessarily in the same direction or of the same magnitude. Further, impacts to the partnership’s fair values of commercial properties from changes in discount or capitalization rates and cash flows are usually inversely correlated. Decreases (increases) in the discount rate or capitalization rate result in increases (decreases) of fair value. Such decreases (increases) may be mitigated by decreases (increases) in cash flows included in the valuation analysis, as circumstances that typically give rise to increased interest rates (e.g., strong economic growth, inflation) usually give rise to increased cash flows at the asset level. Refer to the table below for further information on valuation methods used by the partnership for its asset classes.

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

In accordance with its policy, the partnership generally measures and records its commercial properties and developments using valuations prepared by management. However, for certain recently acquired subsidiaries, including GGP, the partnership has used valuations prepared by external valuation professionals. Additionally, a number of properties are externally appraised each year and the results of those appraisals are compared to the partnership’s internally prepared values.

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, 2018
Dec. 31, 2017
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
7.0
%
5.6
%
12
7.0
%
5.8
%
13

    Canada
Discounted cash flow
6.0
%
5.5
%
10
6.1
%
5.5
%
10

    Australia
Discounted cash flow
6.9
%
6.1
%
10
7.0
%
6.1
%
10

    Brazil
Discounted cash flow
9.6
%
7.6
%
7
9.7
%
7.6
%
7

Core Retail(1)
Discounted cash flow
7.1
%
6.0
%
10
—
%
—
%
—

LP Investments- Office(2)
Discounted cash flow
10.1
%
7.0
%
6
10.2
%
7.5
%
7

LP Investments- Retail
Discounted cash flow
8.9
%
7.7
%
10
9.0
%
8.0
%
10

Industrial
Discounted cash flow
6.6
%
5.7
%
10
6.8
%
6.2
%
10

Mixed-use(2)
Discounted cash flow
8.2
%
5.4
%
10
8.4
%
5.3
%
10

Multifamily(3)
Direct capitalization
4.8
%
n/a

n/a
4.8
%
n/a

n/a

Triple Net Lease(3)
Direct capitalization
6.3
%
n/a

n/a
6.4
%
n/a

n/a

Self-storage(3)
Direct capitalization
5.7
%
n/a

n/a
5.8
%
n/a

n/a

Student Housing(3)
Direct capitalization
5.5
%
n/a

n/a
5.8
%
n/a

n/a

Manufactured Housing(3)
Direct capitalization
5.4
%
n/a

n/a
5.8
%
n/a

n/a

(1)
The partnership obtained control of GGP during the third quarter of 2018 following the acquisition of the common shares not held by the partnership. Subsequent to this transaction, the partnership is consolidating the financial results of GGP. Please see Note 3, Acquisition of GGP Inc., for further information.
(2)
In the third quarter of 2018, the valuation metrics for International Finance Center Seoul (“IFC”) are reported under the mixed-use sector. The valuation metrics for LP Investments- Office have been updated for both periods presented.
(3)
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 condensed consolidated financial statements and the level of the inputs used to determine those fair values in the context of the hierarchy as defined in Note 2(i), Summary of Significant Accounting Policies: Fair value measurement, in the consolidated financial statements as of December 31, 2017:


12             

 
Sep. 30, 2018
Dec. 31, 2017
 
 
 
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
$
—

$
—

$
14,105

$
1,148

$
—

$
—

$
14,259

$
568

Canada
—

—

4,238

110

—

—

4,493

104

Australia
—

—

2,843

49

—

—

2,472

8

Europe
—

—

130

1,209

—

—

120

920

Brazil
—

—

302

—

—

—

327

—

Core Retail(1)
—

—

17,721

309

—

—

—

—

LP Investments
 
 
 
 
 
 
 
 
LP Investments- Office(2)
—

—

7,980

428

—

—

6,044

231

LP Investments- Retail
—

—

3,493

6

—

—

3,406

6

Industrial
—

—

2,341

459

—

—

1,409

533

Multifamily
—

—

4,107

—

—

—

3,925

—

Triple Net Lease
—

—

4,974

—

—

—

4,804

—

Self-storage
—

—

799

79

—

—

1,796

58

Student Housing
—

—

2,040

220

—

—

1,204

149

Manufactured Housing
—

—

2,356

—

—

—

2,206

—

Mixed-Use(2)
—

—

2,511

—

—

—

2,315

—

Total
$
—

$
—

$
69,940

$
4,017

$
—

$
—

$
48,780

$
2,577

(1)
The partnership obtained control of GGP during the third quarter of 2018 following the acquisition of the common shares not previously held by the partnership. Subsequent to this transaction, the partnership is consolidating the financial results of GGP. Please see Note 3, Acquisition of GGP Inc., for further information.
(2)
During the third quarter of 2018, the commercial properties for IFC are reported under the mixed-use sector. The valuation metrics for LP Investments- Office have been updated for both periods presented.

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, 2018, for properties valued using the discounted cash flow or direct capitalization method, respectively:

 
Sep. 30, 2018
(US$ Millions)
Impact on fair value of commercial properties

Core Office
 
United States
$
897

Canada
259

Australia
154

Brazil
35

Core Retail
612

LP Investments
 
LP Investments- Office
283

LP Investments- Retail
147

Industrial
171

Mixed-use
123

Multifamily
203

Triple Net Lease
175

Self-storage
28

Student Housing
93

Manufactured Housing
103

Total
$
3,283


 

13             

NOTE 6. EQUITY ACCOUNTED INVESTMENTS
The partnership has investments in joint arrangements that are joint ventures, and also has investments in associates. Joint ventures hold individual commercial properties and portfolios of commercial properties and developments that the partnership owns together with co-owners where decisions relating to the relevant activities of the joint venture require the unanimous consent of the co-owners. Associates are investments in which the partnership has significant influence over financial and operating decisions but does not have control or joint control. Details of the partnership’s investments in joint ventures and associates, which have been accounted for in accordance with the equity method of accounting, are as follows:
 
 
 
 
Proportion of ownership interests
Carrying value
(US$ Millions)
Principal activity
Principal place of business
Sep. 30, 2018

Dec. 31, 2017

Sep. 30, 2018

Dec. 31, 2017

Joint Ventures
 
 
 
 
 
 
Canary Wharf Joint Venture(1)
Property holding company
United Kingdom
50
%
50
%
$
3,358

$
3,284

BPR JV Pool A(2)
Property holding company
United States
50
%
—
%
1,927

—

BPR JV Pool B(2)
Property holding company
United States
51
%
—
%
1,191

—

Ala Moana Center, Hawaii(2)
Property holding company
United States
50
%
—
%
1,598

 
Manhattan West, New York
Property holding company
United States
56
%
56
%
1,526

1,439

Fashion Show, Las Vegas(2)
Property holding company
United States
50
%
—
%
875

—

The Grand Canal Shoppes, Las Vegas(2)
Property holding company
United States
50
%
—
%
603

—

Grace Building, New York
Property holding company
United States
50
%
50
%
582

585

Oakbrook Center, Illinois(2)
Property holding company
United States
48
%
—
%
519

—

One Liberty Plaza, New York
Property holding company
United States
51
%
51
%
439

408

Southern Cross East, Melbourne(3)
Property holding company
Australia
50
%
50
%
403

407

Brookfield Fairfield U.S. Multifamily Value Add Fund II ("VAMF II")
Property holding company
United States
37
%
37
%
321

291

Park Meadows, Colorado(2)
Property holding company
United States
35
%
—
%
311

—

Miami Design District, Florida(2)
Property holding company
United States
22
%
—
%
298

—

E&Y Complex, Sydney(3)
Property holding company
Australia
50
%
50
%
298

311

Brookfield D.C. Office Partners LLC ("D.C. Fund"), Washington, D.C.
Property holding company
United States
51
%
51
%
294

310

Brookfield Brazil Retail Fundo de Investimento em Participaçõe ("Brazil Retail")
Holding company
Brazil
46
%
46
%
282

339

The Mall in Columbia, Maryland(2)
Property holding company
United States
50
%
—
%
262

—

Shops at Merrick Park, Florida(2)
Property holding company
United States
55
%
—
%
259

—

Kenwood Towne Center, Ohio(2)
Property holding company
United States
50
%
—
%
251

—

Other(4)
Various
Various
10% - 90%

12% - 90%

5,058

2,193

 
 
 
 
 
20,655

9,567

Associates
 
 
 
 
 
 
GGP(2)
Real estate investment trust
United States
—
%
34
%
—

8,844

China Xintiandi (“CXTD”)(5)
Property holding company
China
22
%
22
%
492

499

Diplomat Resort and Spa ("Diplomat")
Property holding company
United States
90
%
90
%
324

339

Brookfield Premier Real Estate Partners Pooling LLC ("BPREP")
Property holding company
United States
9
%
10
%
107

122

Other
Various
Various
23% - 31%

23% - 31%

362

390

 
 
 
 
 
1,285

10,194

Total
 
 
 
 
$
21,940

$
19,761

(1) 
Stork Holdco LP is the joint venture through which the partnership acquired Canary Wharf Group plc (“Canary Wharf”) in London.
(2) 
The partnership obtained control of GGP during the third quarter of 2018 following the acquisition of the common shares not previously held by the partnership. Subsequent to this transaction, the partnership is consolidating the financial results of GGP, including its interests in properties held through joint ventures. The partnership’s 34% interest in GGP prior to the acquisition was deconsolidated. Please see Note 3, Acquisition of GGP Inc., for further information.
(3) 
The partnership exercises joint control over these jointly controlled assets through a participating loan agreement with Brookfield Asset Management that is convertible at any time into a direct equity interest in the entity.
(4) 
Other joint ventures consists of approximately 88 joint ventures, all of which have a carrying value below $250 million.
(5) 
The partnership’s interest in CXTD is held through a subsidiary, BSREP CXTD Holdings L.P., in which it has an approximate 31% interest.

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

14             

The following table presents the change in the balance of the partnership’s equity accounted investments as of September 30, 2018 and December 31, 2017:

 
Nine months ended

Year ended

(US$ Millions)
Sep. 30, 2018

Dec. 31, 2017

Equity accounted investments, beginning of period
$
19,761

$
16,844

GGP joint ventures acquired from business acquisition(1)
10,850

—

Deconsolidation of pre-acquisition GGP equity interest(1)
(8,349
)
—

Additions
510

1,372

Disposals and return of capital distributions
(647
)
(281
)
Share of net earnings from equity accounted investments(2)
581

961

Distributions received
(362
)
(369
)
Foreign currency translation
(300
)
430

Reclassification to assets held for sale(3)
—

(712
)
Impact of warrant conversion(2)
—

1,448

Other comprehensive income and other
(104
)
68

Equity accounted investments, end of period
$
21,940

$
19,761

(1) 
The partnership obtained control of GGP during the third quarter of 2018 following the acquisition of the common shares not previously held by the partnership. As a result of the acquisition, GGP’s interest in joint ventures of $10,850 million was added to the balance of equity accounted investments, offset by the deconsolidation of the partnership’s 34% interest of $7,769 million and fair value loss of $580 million from adjusting the partnership’s interest in GGP to its fair value immediately prior to acquiring control. See Note 3, Acquisition of GGP Inc., for further information.
(2) 
During the fourth quarter of 2017, in the Core Retail segment, 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’s acquisition of an additional 68 million common shares of GGP, increasing its ownership from 29% to 34%. The partnership determined its share of the net fair value of the incremental interests acquired in GGP’s identifiable assets and liabilities. The excess of its share of this net fair value over the cost of the investment of $442 million represents a gain that is included in share of net earnings from equity accounted investments for the year ended December 31, 2017.
(3) 
The partnership’s interest in 245 Park Avenue in Midtown New York was reclassified to assets held for sale in the first quarter of 2017 and sold in the second quarter of 2017.

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, 2018
Dec. 31, 2017
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
6.6
%
5.3
%
11

6.5
%
5.3
%
11
    Australia
Discounted cash flow
6.7
%
5.8
%
10

7.0
%
5.8
%
10
    Europe
Discounted cash flow
4.7
%
4.8
%
10

4.8
%
4.8
%
10
Core Retail
 
 
 
 
 
 
 
    United States(1)
Discounted cash flow
6.7
%
5.3
%
10

7.0
%
5.6
%
10
LP Investments - Office
Discounted cash flow
6.1
%
5.0
%
10

6.6
%
5.7
%
10
LP Investments - Retail
Discounted cash flow
11.3
%
7.1
%
10

11.5
%
7.2
%
11
Industrial
Discounted cash flow
6.2
%
5.4
%
10

6.4
%
5.8
%
10
Multifamily(2)
Direct capitalization
5.1
%
n/a

n/a

5.1
%
n/a

n/a
(1) 
The partnership obtained control of GGP during the third quarter of 2018 following the acquisition of the common shares not previously held by the partnership. Subsequent to this transaction, the partnership is consolidating the financial results of GGP. The period ended September 30, 2018 represents GGP’s joint ventures acquired from the acquisition. The prior period represents the partnership’s 34% interest in GGP prior to the acquisition. Please see Note 3, Acquisition of GGP Inc., for further information.
(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.

15             

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

(US$ Millions)
Sep. 30, 2018

Dec. 31, 2017

Non-current assets
$
87,248

$
83,176

Current assets
13,577

3,679

Total assets
100,825

86,855

Non-current liabilities
35,863

31,913

Current liabilities
4,744

4,446

Total liabilities
40,607

36,359

Net assets
60,218

50,496

Partnership’s share of net assets
$
21,940

$
19,761


 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2018

2017

2018

2017

Revenue
$
1,290

$
1,236

$
3,904

$
3,634

Expenses
1,101

738

1,579

2,144

Income from equity accounted investments(1)
61

129

323

375

Income before fair value gains, net
250

627

2,648

1,865

Fair value (losses) gains, net
(522
)
535

(1,663
)
750

Net income
(272
)
1,162

985

2,615

Partnership’s share of net earnings
$
65

$
371

$
581

$
897

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

NOTE 7. PARTICIPATING LOAN INTERESTS
Participating loan interests represent interests in certain properties in Australia that do not provide the partnership with control over the entity that owns the underlying property and are held at fair value through profit or loss ("FVTPL") on the condensed consolidated balance sheets. The instruments, which are receivable from a wholly-owned subsidiary of Brookfield Asset Management, 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, 2018

Dec. 31, 2017

Sep. 30, 2018

Dec. 31, 2017

Darling Park Complex, Sydney
30
%
30
%
$
266

$
251

IAG House, Sydney(1)
—
%
50
%
—

111

Jessie Street, Sydney(1)
—
%
100
%
—

155

Total participating loan interests
 
 
$
266

$
517

(1) 
In the third quarter of 2018, the partnership amended its agreements to allow the partnership to acquire the trust that holds these underlying properties instead of acquiring the properties directly. This amendment resulted in a change of control, which results in the partnership consolidating the results of these entities.

For the three and nine months ended September 30, 2018, the partnership recognized interest income on the participating loan interests of $2 million (2017 - $7 million) and $15 million (2017 - $21 million), respectively, and fair value gains of $9 million (2017 - $27 million) and $29 million (2017 - $57 million), respectively.

NOTE 8. PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment primarily consists of hospitality assets such as Center Parcs UK, Paradise Island Holdings Limited (“Atlantis”), a portfolio of extended-stay hotels in the U.S. and a hotel at IFC.

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

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

16             

The following table presents the change to the components of the partnership’s hotel assets for the nine months ended September 30, 2018 and for the year ended December 31, 2017:

(US$ Millions)
Sep. 30, 2018

Dec. 31, 2017

Cost:
 
 
Balance at the beginning of period
$
5,451

$
5,417

Acquisitions through business combinations(1)
1,426

281

Additions
323

271

Disposals
(14
)
(34
)
Foreign currency translation
(133
)
262

Reclassification to assets held for sale(2)
—

(746
)
 
7,053

5,451

Accumulated fair value changes:
 
 
Balance at the beginning of period
756

659

Revaluation (loss) gains, net
(2
)
55

Reclassification to assets held for sale(2)
—

42

 
754

756

Accumulated depreciation:
 
 
Balance at the beginning of period
(750
)
(719
)
Depreciation
(216
)
(267
)
Disposals
9

22

Foreign currency translation
13

(8
)
Reclassification to assets held for sale(2)
—

222

 
(944
)
(750
)
Total property, plant and equipment
$
6,863

$
5,457

(1) 
In the first quarter of 2018, the partnership acquired the Extended-Stay Hotel portfolio. See Note 4, Business Acquisitions and Combinations, for more information.
(2) 
In the fourth quarter of 2017, the Hard Rock Hotel and Casino was reclassified to assets held for sale, and was sold to a third party in the first quarter of 2018.

NOTE 9. GOODWILL
Goodwill of $1,124 million at September 30, 2018 (December 31, 2017 - $1,079 million) is primarily attributable to Center Parcs UK and IFC Seoul. The partnership performs a goodwill impairment test annually by assessing if the carrying value of the cash-generating unit, including the allocated goodwill, exceeds its recoverable amount determined as the greater of the estimated fair value less costs to sell or the value in use.

NOTE 10. INTANGIBLE ASSETS
The partnership’s intangible assets are presented on a cost basis, net of accumulated amortization and accumulated impairment losses in the condensed consolidated balance sheets. These intangible assets primarily represent the trademark assets related to Center Parcs UK and Atlantis.

The trademark assets of Center Parcs UK had a carrying amount of $943 million as of September 30, 2018 (December 31, 2017 - $964 million). They have been determined to have an indefinite useful life as the partnership has the legal right to operate these trademarks exclusively in certain territories and in perpetuity. The business model of Center Parcs UK is not subject to technological obsolescence or commercial innovations in any material way.

In addition, intangible assets include the trademark and licensing assets relating to Atlantis. At September 30, 2018, intangible assets of the Atlantis had a carrying value of $207 million (December 31, 2017 - $209 million). They have been determined to have an indefinite useful life as the partnership has the legal right to operate these intangible assets granted under perpetual licenses. The business model of Atlantis is not subject to technological obsolescence or commercial innovations in any material way.

During the year ended December 31, 2017, the partnership reclassified the intangible assets of the Hard Rock Hotel and Casino, which had a carrying value of $45 million, to assets held for sale. The majority of the intangible assets were sold to a third party in the first quarter of 2018, with the remainder sold in the third quarter of 2018.

Intangible assets by class
Useful life (in years)

Trademarks
5 to Indefinite

Management contracts
40

Customer relationships
9

Other
3 to 7


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

17             


The following table presents the components of the partnership’s intangible assets as of September 30, 2018 and December 31, 2017:

(US$ Millions)
Sep. 30, 2018

Dec. 31, 2017

Cost
$
1,306

$
1,271

Accumulated amortization
(44
)
(35
)
Accumulated impairment losses
(48
)
(48
)
Balance, end of period
$
1,214

$
1,188


The following table presents a roll forward of the partnership’s intangible assets for the nine months ended September 30, 2018 and the year ended December 31, 2017:

(US$ Millions)
Sep. 30, 2018

Dec. 31, 2017

Balance, beginning of period
$
1,188

$
1,141

Acquisitions
67

17

Amortization
(12
)
(8
)
Foreign currency translation
(38
)
82

Reclassification to assets held for sale and other(1)
9

(44
)
Balance, end of period
$
1,214

$
1,188

(1) 
In the fourth quarter of 2017, the partnership reclassified the intangible assets of the Hard Rock Hotel and Casino, which had a carrying value of $45 million, to assets held for sale. The majority of these were sold to a third party in the first quarter of 2018.

NOTE 11. OTHER NON-CURRENT ASSETS
The components of other non-current assets are as follows:
(US$ Millions)
Sep. 30, 2018

Dec. 31, 2017

Securities - FVTPL
$
232

$
174

Derivative assets
30

48

Securities - FVTOCI
152

150

Restricted cash
171

153

Inventory
357

216

Other
201

157

Total other non-current assets
$
1,143

$
898


Securities - FVTPL
Securities - FVTPL consists primarily of the partnership’s investment in convertible preferred units of a U.S. hospitality operating company. The preferred units earn a fixed cumulative dividend of 7.5% per annum compounding quarterly. Additionally, the partnership receives distributions in additional convertible preferred units of the U.S. hospitality operating company at 5.0% per annum compounding quarterly. The carrying value of these convertible preferred units at September 30, 2018 was $172 million (December 31, 2017 - $147 million).

Securities - FVTOCI
Securities - FVTOCI 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 - FVTOCI at September 30, 2018 are $101 million (December 31, 2017 - $103 million) of securities pledged as security for a loan payable to the issuer in the amount of $93 million (December 31, 2017 - $93 million) recognized in other non-current financial liabilities.


18             

NOTE 12. ACCOUNTS RECEIVABLE AND OTHER
The components of accounts receivable and other are as follows:

(US$ Millions)
Sep. 30, 2018

Dec. 31, 2017

Derivative assets
$
229

$
37

Accounts receivable(1)
589

421

Restricted cash and deposits
315

237

Prepaid expenses
272

94

Other current assets
285

192

Total accounts receivable and other
$
1,690

$
981

(1) 
See Note 33, Related Parties, for further discussion.

NOTE 13. 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, 2018 and December 31, 2017:
(US$ Millions)
Sep. 30, 2018

Dec. 31, 2017

Investment properties
$
356

$
853

Property, plant and equipment
—

475

Accounts receivable and other assets
35

105

Assets held for sale
391

1,433

Debt obligations
134

1,107

Accounts payable and other liabilities
14

209

Liabilities associated with assets held for sale
$
148

$
1,316


The following table presents the change to the components of the assets held for sale for the nine months ended September 30, 2018 and the year ended December 31, 2017:

(US$ Millions)
Sep. 30, 2018

Dec. 31, 2017

Balance, beginning of period
$
1,433

$
147

Reclassification to assets held for sale, net
1,481

4,641

Disposals
(2,535
)
(3,365
)
Fair value adjustments
75

8

Foreign currency translation
(17
)
7

Other
(46
)
(5
)
Balance, end of period
$
391

$
1,433


At December 31, 2017, assets held for sale included a 50% interest in Bay Adelaide Centre East and West Towers located in Toronto in the Core Office segment, the Hard Rock Hotel and Casino in Las Vegas and thirteen assets within the LP Investment portfolios.

In the first quarter of 2018, the partnership sold 50% of its interest in Bay Adelaide Centre East and West Towers for approximately C$850 million ($660 million), the Hard Rock Hotel and Casino sold for approximately $510 million and eight assets within the LP Investment portfolios sold for approximately $144 million.

At September 30, 2018, assets held for sale included Queens Quay Terminal in Toronto, the partnership’s interest in Jean Edwards Tower in Ottawa and seven assets within the LP Investment portfolios. Queens Quay Terminal and Jean Edwards Tower were both sold in the fourth quarter of 2018.


19             

NOTE 14. DEBT OBLIGATIONS
The partnership’s debt obligations include the following:
 
Sep. 30, 2018
Dec. 31, 2017
(US$ Millions)
Weighted-average rate

Debt balance

Weighted-average rate

Debt balance

Unsecured facilities:
 
 
 
 
Brookfield Property Partners’ credit facilities
4.00
%
1,771

3.10
%
1,363

Brookfield Property Partners’ corporate bonds
4.35
%
232

—
%
—

Brookfield Property REIT Inc. term debt
4.56
%
$
4,900

—%

$
—

Brookfield Property REIT Inc. corporate facility
4.46
%
347

—%

—

Brookfield Property REIT Inc. trusted preferred securities
3.79
%
206

—%

—

Brookfield Office Properties’ (“BPO”) revolving facility
—
%
—

2.60
%
828

Brookfield Office Properties’ senior unsecured note
—
%
—

4.00
%
119

Brookfield Canada Office Properties revolving facility
3.28
%
81

2.89
%
276

BPY BOPC LP credit facility
—
%
—

2.85
%
212

Subsidiary borrowings
5.20
%
554

4.40
%
622

 
 
 
 
 
Secured debt obligations:
 
 
 
 
Funds subscription credit facilities(1)
3.55
%
2,118

2.56
%
436

Fixed rate
4.40
%
31,448

4.59
%
17,666

Variable rate
4.94
%
13,179

4.59
%
16,760

Deferred financing costs
 
(321
)
 
(291
)
Total debt obligations
 
$
54,515

 
$
37,991

 
 
 
 
 
Current
 
4,472

 
6,135

Non-current
 
49,909

 
30,749

Debt associated with assets held for sale
 
134

 
1,107

Total debt obligations
 
$
54,515

 
$
37,991

(1) 
Funds subscription credit facilities are secured by co-investors’ capital commitments.

Debt obligations include foreign currency denominated debt in the functional currencies of the borrowing subsidiaries. Debt obligations by currency are as follows:
 
Sep. 30, 2018
Dec. 31, 2017
(Millions)
U.S. Dollars

 
Local
currency

U.S. Dollars

 
Local
currency

U.S. Dollars
$
41,740

$
41,740

$
25,975

$
25,975

British Pounds
5,037

£
3,866

4,290

£
3,173

Canadian Dollars
2,557

C$
3,302

3,132

C$
3,938

South Korean Won
1,628

₩
1,805,000

1,692

₩
1,805,000

Australian Dollars
1,647

A$
2,281

1,554

A$
1,991

Indian Rupee
1,390

Rs
100,724

1,168

Rs
74,386

Brazilian Reais
472

R$
1,891

471

R$
1,558

Chinese Yuan
65

C¥
446

—

C¥
—

Euros
300

€
259

—

€
—

Deferred financing costs
(321
)
 
 
(291
)
 
 
Total debt obligations
$
54,515

 
 
$
37,991

 
 

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

 
 
 
Non-cash changes in debt obligations
 
(US$ Millions)
Dec. 31, 2017

Debt obligation issuance, net of repayments

Assumed from business combinations

Assumed by purchaser

Amortization of deferred financing costs and (premium) discount

Foreign currency translation

Other

Sep. 30, 2018

Debt obligations
$
37,991

3,771

14,310

(599
)
76

(735
)
(299
)
$
54,515



20             

NOTE 15. CAPITAL SECURITIES
The partnership has the following capital securities outstanding as of September 30, 2018 and December 31, 2017:

(US$ Millions)
Shares outstanding

Cumulative dividend rate

Sep. 30, 2018

Dec. 31, 2017

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

6.25
%
$
558

$
551

Series 2
24,000,000

6.50
%
535

529

Series 3
24,000,000

6.75
%
522

517

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

7.64
%
750

750

Class C Junior Preferred Shares(1)
—

—
%
—

500

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

70% of bank prime

—

—

Series 2(2)
3,000,000

70% of bank prime

—

—

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

5.25
%
23

23

Series 2
699,165

5.75
%
14

14

Series 3
909,994

5.00
%
18

18

Series 4
940,486

5.20
%
18

19

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

9.00
%
249

249

Rouse Series A Preferred Shares
5,600,000

5.00
%
142

142

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

5.00
%
40

40

Brookfield Global Real Estate Special Opportunities Inc. (“BGRESOI”) Preferred Shares
19,844

4.00
%
20

—

Capital Securities – Fund Subsidiaries
 
 
835

813

Total capital securities
 
 
$
3,724

$
4,165

 
 
 
 
 
Current
 
 
824

1,326

Non-current
 
 
2,900

2,839

Total capital securities
 
 
$
3,724

$
4,165

(1) 
In the third quarter of 2018, the Brookfield BPY Holdings Inc. Class C Junior Preferred Shares, held by Brookfield Asset Management, were redeemed.
(2) 
BPO Class B Preferred Shares, Series 1 and 2 capital securities are owned by Brookfield Asset Management. BPO has an offsetting loan receivable against these securities earning interest at 95% of bank prime.

Cumulative preferred dividends on the BOP Split Senior Preferred Shares are payable quarterly, as and when declared by BOP Split. On October 9, 2018, BOP Split declared quarterly dividends payable for the BOP Split Senior Preferred Shares.

Capital securities includes $249 million at September 30, 2018 (December 31, 2017 - $249 million) of preferred equity interests held by a third party investor in Manufactured Housing which have been classified as a liability, rather than as a non-controlling interest, due to the fact the holders are entitled to distributions equal to their capital balance plus 9% annual return payable in monthly distributions until maturity in December 2025.

Capital securities also includes $142 million at September 30, 2018 (December 31, 2017 - $142 million) of preferred equity interests held by a third party investor in Rouse Properties, L.P. (“Rouse”) which have been classified as a liability, rather than as a non-controlling interest, due to the fact that the interests are mandatorily redeemable on or after November 12, 2025 for a set price per unit plus any accrued but unpaid distributions; distributions are capped and accrue regardless of available cash generated.

Capital securities also includes $40 million at September 30, 2018 (December 31, 2017 - $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.

Capital securities also includes $20 million at September 30, 2018 (December 31, 2017 - nil) of preferred equity interests held by a third party investor in BGRESEOI 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 March 9, 2023 for a set price per unit plus any accrued but unpaid distributions; distributions are capped and accrue regardless of available cash generated.

The Capital Securities – Fund Subsidiaries includes $798 million at September 30, 2018 (December 31, 2017 - $775 million) of equity interests in Brookfield DTLA Holdings LLC (“DTLA”) held by co-investors in DTLA which have been classified as a liability, rather than as non-controlling interest, as holders of these interests can cause DTLA to redeem their interests in the fund for cash equivalent to the fair value of the interests on October 15, 2023, and on every fifth anniversary thereafter. Capital Securities – Fund Subsidiaries are measured at FVTPL.


21             

Capital Securities – Fund Subsidiaries also includes $37 million at September 30, 2018 (December 31, 2017 - $38 million) which represents the equity interests held by the partnership’s co-investor in the D.C. Fund which have been classified as a liability, rather than as non-controlling interest, due to the fact that on June 18, 2023, and on every second anniversary thereafter, the holders of these interests can redeem their interests in the D.C. Fund for cash equivalent to the fair value of the interests.

At September 30, 2018, capital securities includes $49 million (December 31, 2017 - $51 million) repayable in Canadian Dollars of C$64 million (December 31, 2017 - C$64 million).

Reconciliation of cash flows from financing activities from capital securities is shown in the table below:
 
 
 
Non-cash changes on capital securities
 
(US$ Millions)
Dec. 31, 2017

Capital securities redeemed

Capital securities issued

Fair value changes

Sep. 30, 2018

Capital securities
$
4,165

$
(555
)
$
75

$
39

$
3,724


NOTE 16. 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)
2018

2017

2018

2017

Current income tax
$
14

$
3

$
106

$
105

Deferred income tax
(51
)
180

(57
)
314

Income tax expense (benefit)
$
(37
)
$
183

$
49

$
419


The partnership’s income tax expense decreased for the three months ended September 30, 2018 and decreased for the nine months ended September 30, 2018 as compared to the same period in the prior year. The decrease in income tax expense in the three months ended September 30, 2018 is due to the tax impact of the GGP acquisition during the quarter. The decrease in the tax expense for the nine months ended September 30, 2018, is primarily due to legislative and entity tax status changes, the tax impact of the GGP acquisition and the recognition of previously unrecognized net operating losses.

NOTE 17. OTHER NON-CURRENT LIABILITIES
The components of other non-current liabilities are as follows:

(US$ Millions)
Sep. 30, 2018

Dec. 31, 2017

Accounts payable and accrued liabilities
$
1,108

$
540

Derivative liabilities
75

160

Provisions
328

216

Loans and notes payables
3

—

Deferred revenue
5

2

Total other non-current liabilities
$
1,519

$
918


NOTE 18. ACCOUNTS PAYABLE AND OTHER LIABILITIES
The components of accounts payable and other liabilities are as follows:

(US$ Millions)
Sep. 30, 2018

Dec. 31, 2017

Accounts payable and accrued liabilities
$
1,951

$
1,636

Loans and notes payable
940

769

Derivative liabilities
201

399

Deferred revenue
300

242

Other liabilities
2

6

Total accounts payable and other liabilities
$
3,394

$
3,052


At September 30, 2018, loans and notes payable includes $733 million (December 31, 2017 - $633 million) of on-demand deposits from Brookfield Asset Management to the partnership.

22             

NOTE 19. EQUITY
The partnership’s capital structure is comprised of six classes of partnership units: GP Units, LP Units, redeemable/exchangeable partnership units of the Operating Partnership (“Redeemable/Exchangeable Partnership Units”), special limited partnership units of the Operating Partnership (“Special LP Units”), limited partnership units of Brookfield Office Properties Exchange LP (“Exchange LP Units”) and BPR Units.

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

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

The following table presents changes to the GP Units and LP Units from the beginning of the year:
 
General partnership units
Limited partnership units
(Thousands of units)
Sep. 30, 2018

Dec. 31, 2017

Sep. 30, 2018

Dec. 31, 2017

Outstanding, beginning of period
139

139

254,989

260,222

Issued on August 28, 2018 for the acquisition of GGP
—

—

109,702

—

Exchange LP Units exchanged
—

—

7,758

285

BPR Units exchanged
—

—

14,798

—

Distribution Reinvestment Program
—

—

124

181

Issued under unit-based compensation plan
—

—

7

215

Repurchase of LP Units
—

—

(733
)
(5,914
)
Outstanding, end of period
139

139

386,645

254,989


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, 2018 and December 31, 2017.

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, 2018 and December 31, 2017.

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, 2018

Dec. 31, 2017

Outstanding, beginning of period
11,078

11,363

Exchange LP Units exchanged(1)
(7,758
)
(285
)
Outstanding, end of period
3,320

11,078

(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.

23             


d)
Class A shares of Brookfield Property REIT Inc.
As detailed in Note 3, Acquisition of GGP Inc., GGP common shareholders, for each GGP share, elected to receive, subject to proration, (i) $23.50 in cash or (ii) either one BPY unit or one BPR Unit. BPR Units allow U.S. investors who are either unable or unwilling to hold LP Units to invest in the partnership. BPR Units are listed and traded on the Nasdaq. BPR Units provide its holders with the right to request that its units be redeemable for cash consideration. In the event BPR Unitholders exercises this right, the partnership has the right at its sole discretion, to satisfy the redemption request with its LP Units, rather than cash, on a one-for-one basis. As a result, BPR Units participates in earnings and distributions on a per unit basis equivalent to the per unit participation of LP Units of the partnership. The partnership presents BPR Units as a component of non-controlling interest.

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

 
Class A shares of Brookfield Property REIT Inc.
(Thousands of units)
Sep. 30, 2018

Dec. 31, 2017

Outstanding, beginning of period
—

—

Issued on August 28, 2018 for the acquisition of GGP
162,324

—

BPR Units exchanged(1)
(14,798
)
—

Forfeitures
(48
)
—

Outstanding, end of period
147,478

—

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

e)
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)
2018

2017

2018

2017

Limited Partners
$
116

$
75

$
278

$
226

Holders of:
 
 
 
 
Redeemable/Exchangeable Partnership Units
166

128

409

383

Special LP Units
1

1

4

4

Exchange LP Units
2

3

8

10

BPR Units
22

—

51

—

Total
$
307

$
207

$
750

$
623

Per unit(1)
$
0.315

$
0.295

$
0.945

$
0.885

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

f)
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)
2018

2017

2018

2017

Net income attributable to limited partners
$
144

$
61

$
532

$
88

Income reallocation related to mandatorily convertible preferred shares
19

10

80

13

Net income attributable to limited partners – basic
163

71

612

101

Dilutive effect of conversion of preferred shares and options(1)
8

0

27

1

Net income attributable to limited partners – diluted
$
171

$
71

$
639

$
102

 
 
 
 
 
(in millions of units/shares)
 
 
 
 
Weighted average number of LP Units outstanding
303.8

255.3

271.8

256.4

Mandatorily convertible preferred shares
70.0

70.0

70.0

70.0

Weighted average number of LP Units - basic
373.8

325.3

341.8

326.4

Dilutive effect of the conversion of preferred shares and options(1)
19.9

0.4

18.4

0.8

Weighted average number of LP units outstanding - diluted
393.7

325.7

360.2

327.2

(1)  
The effect of the conversion of capital securities and options, 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, 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.


24             

NOTE 20. NON-CONTROLLING INTERESTS
Non-controlling interests consists of the following:

(US$ Millions)
Sep. 30, 2018

Dec. 31, 2017

Redeemable/Exchangeable Partnership Units and Special LP Units(1) 
$
12,683

$
14,500

Exchange LP Units(1)
98

285

BPR Units(1)
4,277

—

Interests of others in operating subsidiaries and properties:
 
 
Preferred shares held by Brookfield Asset Management
16

15

Preferred equity of subsidiaries
2,818

2,493

Non-controlling interests in subsidiaries and properties
14,650

10,430

Total interests of others in operating subsidiaries and properties
17,484

12,938

Total non-controlling interests
$
34,542

$
27,723

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

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, 2018

Dec. 31, 2017

Sep. 30, 2018

Dec. 31, 2017

BPO(1)
Canada
—
%
—
%
$
4,348

$
2,982

Brookfield Property REIT Inc.(2)
United States
12
%
—
%
1,814

—

BSREP Industrial Pooling Subsidiary L.P.(3)
United States
70
%
70
%
1,213

878

BSREP CARS Sub-Pooling LLC(3)
United States
71
%
71
%
966

918

Center Parcs UK(3)
United Kingdom
73
%
73
%
886

869

BSREP III Andromeda Pooling L.P.(3)
United States
74
%
—
%
806

—

BSREP II MH Holdings LLC(3)
United States
74
%
74
%
721

593

BSREP II Korea Office Holdings Pte. Ltd.(3)
South Korea
78
%
78
%
715

706

BSREP II PBSA Ltd.(3)
Bermuda
75
%
74
%
674

501

BSREP II Aries Pooling LLC(3)
United States
74
%
74
%
622

652

BSREP II Retail Upper Pooling LLC(3)
United States
50
%
50
%
602

670

BSREP India Office Holdings Pte. Ltd.(3)
United States
67
%
67
%
574

424

BSREP UA Holdings LLC(3)
Cayman Islands
70
%
70
%
500

487

BSREP II Brazil Pooling LLC(3)
United States
68
%
68
%
449

472

BREF ONE, LLC(3)
United States
67
%
67
%
280

483

Brookfield Strategic Real Estate Partners II Storage REIT LLC(3)
United States
75
%
74
%
242

564

Other
Various
18% - 77%

18% - 76%

2,072

1,739

Total
 
 
 
$
17,484

$
12,938

(1) 
Includes non-controlling interests in BPO subsidiaries which vary from 1% - 100%.
(2) 
Includes non-controlling interests in subsidiaries of BPR.
(3) 
Includes non-controlling interests representing interests held by other investors in Brookfield Asset Management-sponsored funds and holding entities through which the partnership participates in Brookfield Asset Management -sponsored funds. Also includes non-controlling interests in underlying operating entities owned by Brookfield Asset Management sponsored funds.


25             

NOTE 21. COMMERCIAL PROPERTY REVENUE
The components of commercial property revenue are as follows:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2018

2017

2018

2017

Base rent(1)
$
857

$
933

$
2,394

$
2,727

Straight-line rent
27

36

77

94

Lease termination
6

5

32

13

Other lease income(1)(2)
161

—

427

—

Other revenue from tenants(3)
200

—

548

—

Other(1)
—

92

—

277

Total commercial property revenue
$
1,251

$
1,066

$
3,478

$
3,111

(1) 
The partnership adopted IFRS 15, Revenues from Contracts with Customers, in 2018 using the modified retrospective method. The comparative information has not been restated and is reported under the accounting standards effective for those periods.
(2) 
Other lease income includes parking revenue and recovery of property tax and insurance expenses from tenants.
(3) 
Consists of recovery of certain operating expenses from tenants which are accounted for in accordance with IFRS 15.

NOTE 22. HOSPITALITY REVENUE
The components of hospitality revenue are as follows:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2018

2017

2018

2017

Room, food and beverage(1)
$
357

$
410

$
1,032

$
1,214

Gaming, and other leisure activities(1)
114

—

336

—

Other hospitality revenue(1)
31

—

92

—

Total hospitality revenue
$
502

$
410

$
1,460

$
1,214

(1) 
The partnership adopted IFRS 15, in 2018 using the modified retrospective method. The comparative information has not been restated and is reported under the accounting standards effective for those periods.

NOTE 23. 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)
2018

2017

2018

2017

Investment income
$
19

$
4

$
40

$
144

Fee revenue
38

16

71

38

Dividend income
2

7

8

12

Interest income and other
14

—

27

17

Participating loan notes
2

7

15

21

Total investment and other revenue
$
75

$
34

$
161

$
232


NOTE 24. 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)
2018

2017

2018

2017

Property maintenance
$
196

$
181

$
544

$
523

Real estate taxes
138

118

374

351

Employee compensation and benefits
51

43

149

120

Ground rents
14

14

43

43

Other
79

63

198

164

Total direct commercial property expense
$
478

$
419

$
1,308

$
1,201



26             

NOTE 25. DIRECT HOSPITALITY EXPENSE
The components of direct hospitality expense are as follows:
 
 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2018

2017

2018

2017

Employee compensation and benefits
$
77

$
69

$
239

$
217

Cost of food, beverage, and retail goods sold
66

61

203

177

Maintenance and utilities
46

30

130

94

Marketing and advertising
15

11

57

41

Other
111

78

313

259

Total direct hospitality expense
$
315

$
249

$
942

$
788


NOTE 26. 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)
2018

2017

2018

2017

Depreciation and amortization of real estate assets
$
70

$
61

$
201

$
177

Depreciation and amortization of non-real estate assets
11

8

28

24

Total depreciation and amortization
$
81

$
69

$
229

$
201


NOTE 27. 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)
2018

2017

2018

2017

Employee compensation and benefits
$
72

$
47

$
167

$
149

Management fees
40

42

114

126

Transaction costs and other
129

58

312

179

Total general and administrative expense
$
241

$
147

$
593

$
454


NOTE 28. 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)
2018

2017

2018

2017

Commercial properties
$
217

$
533

$
626

$
678

Commercial developments
70

90

454

194

Financial instruments and other(1)
269

(284
)
863

(155
)
Total fair values gains, net
$
556

$
339

$
1,943

$
717

(1)  
Includes bargain purchase gains from business acquisitions and combinations of $896 million (2017 - $157 million), including a gain on bargain purchase of GGP in the third quarter of 2018 of $657 million. See Note 3, Acquisition of GGP Inc., for further information.

NOTE 29. 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, 2018, the partnership incurred $4 million (2017 - $4 million) and $3 million (2017 - $13 million), respectively, of expense in connection with its unit-based compensation plans.

a)
BPY Unit Option Plan
Awards under the BPY Plan (“BPY Awards”) generally vest 20% per year over a period of five years and expire 10 years after the grant date, with the exercise price set at the time such options were granted and generally equal to the market price of an LP Unit on the Nasdaq 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.

27             


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 measurement
Sep. 30, 2018
Exercise price
US$
22.50

Average term to exercise
In years
7.50

Unit price volatility
%
23
%
Liquidity discount
%
25
%
Weighted average of expected annual dividend yield
%
6.50
%
Risk-free rate
%
2.82
%
Weighted average fair value per option
US$
0.74


i.
Equity-settled BPY Awards
The change in the number of options outstanding under the equity-settled BPY Awards at September 30, 2018 and December 31, 2017 is as follows:

 
Sep. 30, 2018
Dec. 31, 2017
 
Number of
options

Weighted average
exercise price

Number of
options

Weighted average
exercise price

Outstanding, beginning of period
13,801,795

$
20.54

16,338,511

$
20.49

Granted
800,000

22.50

93,750

22.92

Exercised
(36,806
)
17.71

(1,194,569
)
18.97

Expired/forfeited
(166,412
)
22.91

(1,435,897
)
21.51

Reclassified(1)
(437,151
)
22.48

—

—

Outstanding, end of period
13,961,426

$
20.57

13,801,795

$
20.54

Exercisable, end of period
9,628,246

$
20.26

7,352,112

$
20.22

(1)  
Relates to the reclassification of equity-settled options for employees in Brazil to cash-settled options subsequent to the amendment of the BPY Plan, which was amended on February 7, 2018.

The following table sets out details of options issued and outstanding at September 30, 2018 and December 31, 2017 under the equity-settled BPY Awards by expiry date:

 
Sep. 30, 2018
Dec. 31, 2017
Expiry date
Number of
options
Weighted average
exercise price

Number of
options

Weighted average
exercise price

2020
226,800
$
13.07

226,800

$
13.07

2021
246,400
17.44

246,400

17.44

2022
508,300
18.07

517,300

18.07

2023
656,220
16.80

675,420

16.80

2024
7,912,800
20.59

7,946,313

20.59

2025
1,407,705
25.18

1,730,210

25.18

2026
2,109,451
19.51

2,365,602

19.51

2027
93,750
22.92

93,750

22.92

2028
800,000
22.50

—

—

Total
13,961,426
$
20.57

13,801,795

$
20.54


28             


ii.
Cash-settled BPY Awards
The change in the number of options outstanding under the cash-settled BPY Awards at September 30, 2018 and December 31, 2017 is as follows:

 
Sep. 30, 2018
Dec. 31, 2017
 
Number of options

Weighted average
exercise price

Number of options

Weighted average
exercise price

Outstanding, beginning of period
7,144,871

$
20.30

7,377,042

$
20.28

Granted
—

—

—

—

Exercised
(3,770)

19.51

(213,106)

19.12

Expired/forfeited
(191,636)

21.74

(19,065
)
24.42

Reclassified(1)
437,151

22.48

—

—

Outstanding, end of period
7,386,616

$
20.40

7,144,871

$
20.30

Exercisable, end of period
5,655,135

$
20.18

3,973,290

$
19.93

(1)  
Relates to the reclassification of equity-settled options for employees in Brazil to cash-settled options subsequent to the amendment of the BPY Plan, which was amended on February 7, 2018.

The following table sets out details of options issued and outstanding at September 30, 2018 and December 31, 2017 under the cash-settled BPY Awards by expiry date:

 
Sep. 30, 2018
Dec. 31, 2017
Expiry date
Number of
options

Weighted average
exercise price

Number of
options

Weighted average
exercise price

2020
69,000

$
13.07

69,000

$
13.07

2021
172,800

17.44

172,800

17.44

2022
515,800

18.09

515,800

18.09

2023
519,000

16.80

519,000

16.80

2024
4,278,663

20.59

4,330,286

20.59

2025
859,059

25.18

695,376

25.18

2026
972,294

19.51

842,609

19.51

Total
7,386,616

$
20.40

7,144,871

$
20.30


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

As of September 30, 2018, the total number of Restricted Units outstanding was 153,782 (December 31, 2017 - 440,527) with a weighted average exercise price of $20.97 (December 31, 2017 - $21.08).

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

As of September 30, 2018, the total number of Canadian Restricted Units outstanding was 21,624 (December 31, 2017 - 21,624) with a weighted average exercise price of C$22.88 (December 31, 2017 - C$22.88).

d)
Deferred Share Unit Plan
In addition to the above, BPO has a deferred share unit plan. At September 30, 2018, BPO has 1,431,044 deferred share units (December 31, 2017 - 1,363,938) outstanding and vested.

e)
GGP LTIP Plans
In connection with the GGP acquisition, the partnership issued Brookfield Property Partners BPY Unit Option Plan (GGP) (“GGP Option”) and Appreciation Only LTIP Units of GGP Operating Partnership, LP (“GGP AO LTIP”) awards to certain GGP employees.  Each GGP Option will vest within 10 years following the original grant date and is redeemable for LP Units or a cash payment equal to the amount by which the fair market value of an LP Unit at the date exceeds the exercise price of the BPY Option. Each GGP AO LTIP will vest within ten years of its original grant date and is redeemable for LP Units or a cash payment subject to a conversion adjustment.


29             

As of September 30, 2018, the total number of GGP Options outstanding was 1,068,818 (December 31, 2017 - nil) with a weighted average exercise price of $19.70 (December 31, 2017 - nil).

As of September 30, 2018, the total number of GGP AO LTIP outstanding was 1,387,289 (December 31, 2017 - nil) with a weighted average exercise price of $22.51 (December 31, 2017 - nil).

NOTE 30. OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) consists of the following:
 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2018

2017

2018

2017

Items that may be reclassified to net income:
 
 
 
 
Foreign currency translation
 
 
 
 
Net unrealized foreign currency translation (losses) gains in respect of foreign operations
$
(280
)
$
377

$
(989
)
$
1,035

Reclassification of realized foreign currency translation gains to net income on dispositions of foreign operations
—

50

—

50

Gains (losses) on hedges of net investments in foreign operations, net of income taxes for the three and nine months ended Sep. 30, 2018 of ($2) million and ($7) million, respectively (2017 – $6 million and $19 million)(1)
91

(149
)
299

(512
)

(189
)
278

(690
)
573

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, 2018 of ($3) million and ($15) million, respectively (2017 – ($6) million and ($13) million)
9

1

62

40


9

1

62

40

Available-for-sale securities
 
 
 
 
Net change in unrealized gains on available-for-sale securities, net of income taxes
—

(1
)
—

—


—

(1
)
—

—

Equity accounted investments
 
 
 
 
Share of unrealized foreign currency translation (losses) gains in respect of foreign operations
(1
)
3

(2
)
5

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

2

31

3


8

5

29

8

Items that will not be reclassified to net income:
 
 
 
 
Unrealized (losses) on securities - FVTOCI, net of income taxes for the three and nine months ended Sep. 30, 2018 of nil and $2 million (2017 - nil and nil)
(1
)
—

(5
)
—

Net remeasurement (losses) on defined benefit obligations
—

—

2

(2
)
Revaluation surplus
1

—

3

—

 
—

—

—

(2
)
Total other comprehensive income (loss)
$
(172
)
$
283

$
(599
)
$
619

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

30             


NOTE 31. 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, 2018, the partnership has commitments totaling approximately $778 million for the development of Manhattan West in Midtown New York, Greenpoint Landing in Brooklyn, the SoNo Collection in Connecticut, the Staten Island Mall in New York, as well as the redevelopment of One Allen Center, Two Allen Center, and Three Allen Center in Houston, approximately £138 million ($180 million) for the development of 100 Bishopsgate in London and approximately AED 364 million ($99 million) for the development of ICD Brookfield Place in Dubai.

During 2013, Brookfield Asset Management announced the final close on the $4.4 billion Brookfield Strategic Real Estate Partners (“BSREP”) fund, a global private fund focused on making opportunistic investments in commercial property. The partnership, as lead investor, committed approximately $1.3 billion to the fund. As of September 30, 2018, 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, 2018, there remained approximately $760 million of uncontributed capital commitments.

In November 2017, Brookfield Asset Management announced the final close on the $2.9 billion fifth Brookfield Real Estate Finance Fund (“BREF”) to which the partnership had committed $400 million. As of September 30, 2018, there remained approximately $295 million of uncontributed capital commitments.

In September 2018, Brookfield Asset Management announced the final close on the $1.0 billion third Brookfield Fairfield U.S. Multifamily Value Add Fund (“VAMF”) to which the partnership had committed $300 million. As of September 30, 2018, there remained approximately $240 million of uncontributed capital commitments.
 
The partnership maintains insurance on its properties in amounts and with deductibles that it believes are in line with what owners of similar properties carry. The partnership maintains all risk property insurance and rental value coverage (including coverage for the perils of flood, earthquake and named windstorm). The partnership does not conduct its operations, other than those of equity accounted investments, through entities that are not fully or proportionately consolidated in these financial statements, and has not guaranteed or otherwise contractually committed to support any material financial obligations not reflected in these financial statements.

NOTE 32. FINANCIAL INSTRUMENTS
a)
Derivatives and hedging activities
The partnership and its operating entities use derivative and non-derivative instruments to manage financial risks, including interest rate, commodity, equity price and foreign exchange risks. The use of derivative contracts is governed by documented risk management policies and approved limits. The partnership does not use derivatives for speculative purposes. The partnership and its operating entities use the following derivative instruments to manage these risks:
 
•
foreign currency forward contracts to hedge exposures to Canadian Dollar, Australian Dollar, British Pound, Euro, Chinese Yuan, Brazilian Real, Indian Rupee and South Korean Won denominated net investments in foreign subsidiaries and foreign currency denominated financial assets;
•
interest rate swaps to manage interest rate risk associated with planned refinancings and existing variable rate debt; and
•
interest rate caps to hedge interest rate risk on certain variable rate debt.
 


31             

Interest Rate Hedging
The following table provides the partnership’s outstanding derivatives that are designated as cash flow hedges of variability in interest rates associated with forecasted fixed rate financings and existing variable rate debt as of September 30, 2018 and December 31, 2017:

(US$ Millions)
Hedging item
Notional

Rates
Maturity dates
Fair value

Sep. 30, 2018
Interest rate caps of US$ LIBOR debt
$
4,838

2.3% - 4.8%
Jun. 2019 - Sep. 2023
$
4

 
Interest rate swaps of US$ LIBOR debt
1,808

1.0% - 2.7%
Nov. 2018 - Mar. 2022
6

 
Interest rate caps of £ LIBOR debt
937

1.3% - 2.0%
Dec. 2019 - Jan. 2021
—

 
Interest rate swaps of £ LIBOR debt
68

1.5%
Apr. 2020
(1
)
 
Interest rate swaps of € EURIBOR debt
116

1.0% - 1.3%
Apr. 2020 - Apr. 2021
—

 
Interest rate caps of C$ LIBOR debt
186

3.0%
Oct. 2020 - Oct. 2022
—

 
Interest rate swaps of C$ LIBOR debt
50

3.7% - 4.3%
Nov. 2021
1

 
Interest rate swaps on forecasted fixed rate debt
100

4.0%
Jun. 2019
(153
)
Dec. 31, 2017
Interest rate caps of US$ LIBOR debt
$
1,958

2.3% - 3.5%
May 2018 - Oct. 2020
$
1

 
Interest rate swaps of US$ LIBOR debt
1,692

0.7% - 2.2%
Jun. 2018 - Mar. 2022
19

 
Interest rate caps of £ LIBOR debt
452

1.3%
Dec. 2019
—

 
Interest rate swaps of £ LIBOR debt
71

1.5%
Apr. 2020
1

 
Interest rate swaps of C$ LIBOR debt
50

3.7% - 4.3%
Nov. 2021
1

 
Interest rate swaps on forecasted fixed rate debt
100

4.0%
Jun. 2029
(13
)

For the three and nine months ended September 30, 2018, the amount of hedge ineffectiveness recorded in earnings in connection with the partnership’s interest rate hedging activities was nil and $17 million (2017 - $11 million and $13 million), respectively.

Foreign Currency Hedging
The following table provides the partnership’s outstanding derivatives that are designated as net investments of foreign subsidiaries or foreign currency cash flow hedges as of September 30, 2018 and December 31, 2017:

(US$ Millions)
Hedging item
 
Notional

Rates
Maturity dates
Fair value

Sep. 30, 2018
Net investment hedges
€
345

 €0.78/$ - €0.85/$
 Dec. 2018 - Sep. 2019
$
10

 
Net investment hedges
£
2,361

 £0.70/$ - £0.78/$
Oct. 2018 - Nov. 2019
49

 
Net investment hedges
A$
687

 A$1.28/$ - A$1.40/$
 Oct. 2018 - Nov. 2019
(3
)
 
Net investment hedges
C¥
2,672

 C¥6.42/$ - C¥6.94/$
 Nov. 2018 - Aug. 2019
11

 
Net investment hedges
C$
118

 C$1.31/$
Oct. 2018 - Dec. 2018
(1
)
 
Net investment hedges
₩
616,289

 ₩1,095.80/$ - ₩1,109.82/$
 Dec. 2018 - Sep. 2019
1

 
Net investment hedges
Rs
30,543

 Rs67.44/$ - Rs69.71/$
Oct. 2018 - May 2019
33

 
Net investment hedges
£
77

 £0.88/€ - £0.92/€
 Jan. 2019 - Feb. 2020
(1
)
 
Cross currency swap on C$ LIBOR debt
C$
300

 C$1.33/$
Jul. 2023
5

Dec. 31, 2017
Net investment hedges
€
191

 €0.83/$ - €0.92/$
 Jan. 2018 - Dec. 2018
$
(7
)
 
Net investment hedges
£
2,923

 £0.73/$ - £0.81/$
 Jan. 2018 - Jan. 2019
(237
)
 
Net investment hedges
A$
768

 A$1.26/$ - A$1.38/$
 Jan. 2018 - Feb. 2019
(21
)
 
Net investment hedges
C¥
1,165

 C¥6.71/$ - C¥7.09/$
 Jan. 2018 - Dec. 2018
(7
)
 
Net investment hedges
C$
127

 C$1.25/$ - C$1.26/$
 Oct. 2018 - Dec. 2018
—

 
Cash flow hedges
C$
150

 C$1.27/$
 Apr. 2018
1

 
Net investment hedges
₩
616,289

 ₩1,084.95/$ - ₩1,127.75/$
 Aug. 2018 - Jan. 2019
(26
)
 
Cash flow hedges
Rs
771

 Rs65.24/$
 Mar. 2018
—


For the three and nine months ended September 30, 2018 and 2017, the amount of hedge ineffectiveness recorded in earnings in connection with the partnership’s foreign currency hedging activities was not significant.

32             

Other Derivatives
The following table presents details of the partnership’s other derivatives, not designated as hedges for accounting purposes, that have been entered into to manage financial risks as of September 30, 2018 and December 31, 2017:

(US$ Millions)
Derivative type
Notional


Rates

Maturity
dates
Fair value

Sep. 30, 2018
Interest rate caps
$
4,691

2.8% - 5.8%

Oct. 2018 - Oct. 2021
$
1

 
Interest rate swaps on forecasted fixed rate debt
1,660

2.3% - 6.0%

Nov. 2018 - Jun. 2030
12

 
Interest rate swaps of US$ LIBOR debt
800

2.4% - 2.7%

Jul. 2019 - Nov. 2020
(3
)
 
Interest rate swaptions
335

1.0
%
Nov. 2018 - Nov. 2028
—

Dec. 31, 2017
Interest rate caps
$
5,351

2.5% - 5.8%

Jan. 2018 - Oct. 2020
$
1

 
Interest rate swaps on forecasted fixed rate debt
1,660

1.9% - 6.0%

Jun. 2028 - Dec. 2029
(194
)
 
Interest rate swaps of US$ LIBOR debt
1,050

1.4% - 1.6%

Sep. 2018 - Nov. 2020
10

 
Interest rate swaptions
560

1.0
%
 Jun. 2018 - Nov. 2018
—


For the three and nine months ended September 30, 2018, the partnership recognized fair value gains, net of approximately $18 million and $71 million (2017 - losses of $6 million and $33 million) related to the settlement of certain forward starting interest rate swaps that have not been designated as hedges.

b)
Measurement and classification of financial instruments

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

 
 
Sep. 30, 2018
Dec. 31, 2017
 
 
Under IFRS 9
Under IAS 39
(US$ Millions)
Classification and measurement basis
Carrying value

Fair value

Carrying value

Fair value

Financial assets
 
 
 
 
 
Participating loan interests
FVTPL
$
266

$
266

$
517

$
517

Loans and notes receivable
Amortized cost
551

551

185

185

Other non-current assets
 
 
 
 
 
Securities - FVTPL
FVTPL
232

232

174

174

Derivative assets
FVTPL
30

30

48

48

Securities - FVTOCI
FVTOCI
152

152

150

150

Restricted cash
Amortized cost
171

171

153

153

Current assets
 
 
 
 
 
  Derivative assets
FVTPL
229

229

37

37

Accounts receivable(1)
Amortized cost
638

638

536

536

Restricted cash
Amortized cost
315

315

237

237

Cash and cash equivalents
Amortized cost
2,444

2,444

1,491

1,491

Total financial assets
 
$
5,028

$
5,028

$
3,528

$
3,528

Financial liabilities
 
 
 
 
 
Debt obligations(2)
Amortized cost
$
54,515

$
55,035

$
37,991

$
38,726

Capital securities
Amortized cost
2,889

2,895

3,352

3,358

Capital securities - fund subsidiaries
FVTPL
835

835

813

813

Other non-current liabilities
 
 
 
 
 
Loan payable
FVTPL
24

24

23

23

Accounts payable
Amortized cost
1,084

1,084

517

517

Derivative liabilities
FVTPL
75

75

160

160

Accounts payable and other liabilities
 
 
 
 
 
Accounts payable and other(3)
Amortized cost
2,905

2,905

2,614

2,614

Derivative liabilities
FVTPL
201

201

399

399

Total financial liabilities
 
$
62,528

$
63,054

$
45,869

$
46,610

(1) 
Includes other receivables associated with assets classified as held for sale on the condensed consolidated balance sheet in the amount of $35 million and $105 million as of September 30, 2018 and December 31, 2017, respectively.
(2) 
Includes debt obligations associated with assets classified as held for sale on the condensed consolidated balance sheet in the amount of $134 million and $1,107 million as of September 30, 2018 and December 31, 2017, respectively.
(3) 
Includes accounts payable and other liabilities associated with assets classified as held for sale on the condensed consolidated balance sheet in the amount of $14 million and $209 million as of September 30, 2018 and December 31, 2017, respectively.
 

33             

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

The following table outlines financial assets and liabilities measured at fair value in the consolidated financial statements and the level of the inputs used to determine those fair values in the context of the hierarchy as defined above:
 
Sep. 30, 2018
Dec. 31, 2017
 
Under IFRS 9
Under IAS 39
 (US$ Millions)
 Level 1
Level 2
Level 3
 Total
 Level 1
Level 2
Level 3
 Total
Financial assets
 
 
 
 
 
 
 
 
Participating loan interests
$
—

$
—

$
266

$
266

$
—

$
—

$
209

$
209

Securities - FVTPL
—

—

232

232

—

—

174

174

Securities - FVTOCI
—

—

152

152

—

—

150

150

Derivative assets
—

259

—

259

—

85

—

85

Total financial assets
$
—

$
259

$
650

$
909

$
—

$
85

$
533

$
618

 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
Capital securities - fund subsidiaries
$
—

$
—

$
835

$
835

$
—

$
—

$
813

$
813

Derivative liabilities
—

276

—

276

—

559

—

559

Loan payable
—

—

24

24

—

—

23

23

Total financial liabilities
$
—

$
276

$
859

$
1,135

$
—

$
559

$
836

$
1,395


There were no transfers between levels during the three and nine months ended September 30, 2018 and the year ended December 31, 2017.

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, 2018 and December 31, 2017:

 
Sep. 30, 2018
Dec. 31, 2017
 
Under IFRS 9
Under IAS 39

(US$ Millions)
Financial
assets
 
Financial
liabilities
 
Financial
assets
 
Financial
liabilities
 
Balance, beginning of period
$
835

$
836

$
1,605

$
821

Acquisitions
 
101

 
—

 
144

 
49

Dispositions
 
(7
)
 
(2
)
 
(986
)
 
(4
)
Fair value gains, net and OCI
 
(28
)
 
25

 
(216
)
 
(30
)
Other
 
(251
)
 
—

 
(14
)
 
—

Balance, end of period
$
650

$
859

$
533

$
836


NOTE 33. RELATED PARTIES
In the normal course of operations, the partnership enters into transactions with related parties. These transactions have been measured at exchange value and are recognized in the consolidated financial statements. The immediate parent of the partnership is Brookfield Property Partners Limited. The ultimate parent of the partnership is Brookfield Asset Management. Other related parties of the partnership include Brookfield Asset Management’s subsidiaries and operating entities, certain joint ventures and associates accounted for under the equity method, as well as officers of such entities and their spouses.

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

The base management fee for the three and nine months ended September 30, 2018 was $25 million (2017 - $26 million) and $73 million (2017 - $78 million), respectively. The equity enhancement distribution is $1 million both for the three and nine months ended September 30, 2018 (2017 - $7 million and $20 million), respectively.


34             

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.

The following table summarizes transactions with related parties:
(US$ Millions)
Sep. 30, 2018

Dec. 31, 2017

Balances outstanding with related parties:
 
 
Participating loan interests
$
266

$
517

Net (payables)/receivables within equity accounted investments
(23
)
(49
)
Loans and notes receivable(1)
72

96

Receivables and other assets
9

11

Deposit and promissory note from Brookfield Asset Management
(733
)
(633
)
Property-specific debt obligations
(383
)
(415
)
Loans and notes payable and other liabilities
(211
)
(156
)
Capital securities held by Brookfield Asset Management(2)
(750
)
(1,250
)
Preferred shares held by Brookfield Asset Management
(15
)
(15
)
(1) 
At September 30, 2018, includes $72 million (December 31, 2017 - $96 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.
(2) 
During the third quarter of 2018, the Brookfield BPY Holdings Inc. Class C Junior Preferred shares, held by Brookfield Asset Management, were redeemed.

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2018

2017

2018

2017

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

$
4

$
14

$
14

Management fee income
1

1

4

4

Participating loan interests (including fair value gains, net)
13

33

45

77

Interest expense on debt obligations
9

3

29

21

Interest on capital securities held by Brookfield Asset Management
16

26

54

64

General and administrative expense(2)
57

51

153

151

Construction costs(3)
64

99

289

243

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

During the first quarter of 2018, the partnership along with BPREP acquired a 25% and 75% interest, respectively, in 333 West 34th Street, an office building in New York for $255 million.

During the third quarter, the partnership sold 27.5% of its interest in a portfolio of operating and development assets in New York. The partnership retains control over and will continue to consolidate these assets after the sale. The interest was sold to Brookfield Asset Management for consideration of approximately $1.4 billion. Brookfield Asset Management is currently in the process of syndicating its entire 27.5% equity interest to third-party investors.

NOTE 34. 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.

35             

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, 2018
Brookfield Property Partners L.P.

BOP Split

BPO

Brookfield Property Preferred Equity Inc.

Brookfield Property Finance ULC

Holding entities(2)

Additional holding entities and eliminations(3)

Consolidating
adjustments(4)

Brookfield Property Partners L.P consolidated

Revenue
$
—

$
4

$
28

$
—

$
3

$
344

$
15

$
1,434

$
1,828

Net income attributable to unitholders(1)
155

299

(980
)
—

—

380

(5
)
531

380

For the three months ended Sep. 30, 2017
 
 
 
 
 
 
 
 
 
Revenue
$
—

$
—

$
34

—

—

$
116

$
—

$
1,360

$
1,510

Net income attributable to unitholders(1)
62

(79
)
(90
)
—

—

175

17

83

168

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


(US$ Millions)
For the nine months ended Sep. 30, 2018
Brookfield Property Partners L.P.

BOP Split

BPO

Brookfield Property Preferred Equity Inc.

Brookfield Property Finance ULC

Holding entities(2)

Additional holding entities and eliminations(3)

Consolidating
adjustments(4)

Brookfield Property Partners L.P consolidated

Revenue
$
—

$
18

$
103

$
—

$
3

$
807

$
30

$
4,138

$
5,099

Net income attributable to unitholders(1)
549

409

(1,307
)
—

—

1,444

(25
)
374

1,444

For the nine months ended Sep. 30, 2017
 
 
 
 
 
 
 
 
 
Revenue
$
—

$
—

$
178

$
—

$
—

$
445

$
—

$
3,934

$
4,557

Net income attributable to unitholders(1)
89

(294
)
(471
)
—

—

248

17

652

241

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


(US$ Millions)
As of Sep. 30, 2018
Brookfield Property Partners L.P.

BOP Split

BPO

Brookfield Property Preferred Equity Inc.

Brookfield Property Finance ULC

Holding entities(2)

Additional holding entities and eliminations(3)

Consolidating
adjustments(4)

Brookfield Property Partners L.P consolidated

Current assets
$
—

$
54

$
178

$
—

$
235

$
5,474

$
364

$
(2,066
)
$
4,239

Non-current assets
13,269

15,265

19,516

—

—

30,134

1,741

27,028

106,953

Assets held for sale
—

—

—

—

—

—

—

391

391

Current liabilities
—

2,495

1,845

—

234

5,635

1,950

(3,469
)
8,690

Non-current liabilities
—

3,103

2,730

—

—

1,699

—

49,455

56,987

Liabilities associated with assets held for sale
—

—

—

—

—

—

—

148

148

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

—

2,284

—

—

—

—

15,200

17,484

Equity attributable to unitholders(1)
$
13,269

$
9,721

$
12,835

$
—

$
1

$
28,274

$
155

$
(35,981
)
$
28,274

(1) 
Includes net income attributable to LP Units, GP Units, Redeemable/Exchangeable Partnership Units, Special LP Units, Exchange LP Units and BPR Units.
(2) 
Includes the operating partnership, Brookfield BPY Holdings Inc., Brookfield BPY Retail Holdings II Inc., BPY Bermuda Holdings Limited, and BPY Bermuda Holdings II Limited.

36             

(3) 
Includes BPY Bermuda Holdings IV Limited, BPY Bermuda Holdings V Limited and BPY Bermuda Holdings VI Limited, which serve as guarantors for BPO but not BOP Split, net of intercompany balances and transactions with other holding entities.
(4) 
Includes elimination of intercompany transactions and balances necessary to present the partnership on a consolidated basis.
(US$ Millions)
As of Dec. 31, 2017
Brookfield Property Partners L.P.

BOP Split

BPO

Brookfield Property Preferred Equity Inc.

Brookfield Property Finance ULC

Holding entities(2)

Additional holding entities and eliminations(3)

Consolidating
adjustments(4)

Brookfield Property Partners L.P consolidated

Current assets
$
—

$
93

$
91

$
—

$
—

$
3,019

$
24

$
(748
)
$
2,479

Non-current assets
8,190

13,310

21,234

—

—

28,194

1,532

7,975

80,435

Assets held for sale
—

—

—

—

—

—

—

1,433

1,433

Current liabilities
—

544

5,518

—

—

1,186

845

2,420

10,513

Non-current liabilities
—

4,695

1,726

—

—

7,841

743

22,389

37,394

Liabilities associated with assets held for sale
—

—

—

—

—

—

—

1,316

1,316

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

—

2,284

—

—

—

—

10,654

12,938

Equity attributable to unitholders(1)
$
8,190

$
8,164

$
11,797

$
—

$
—

$
22,186

$
(32
)
$
(28,119
)
$
22,186

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

NOTE 35. SEGMENT INFORMATION
a)
Operating segments
IFRS 8, Operating Segments, requires operating segments to be determined based on internal reports that are regularly reviewed by the chief operating decision maker (“CODM”) for the purpose of allocating resources to the segment and to assessing its performance. On July 1, 2018, the partnership realigned its LP Investments segment (formerly referred to as Opportunistic) to include the corporate function of the Brookfield-sponsored real estate opportunity funds, previously included in the Corporate segment, to more closely align with the how the partnership now presents financial information to the CODM and investors. As of September 30, 2018, the partnership is organized into four reportable segments: i) Core Office, ii) Core Retail, iii) LP Investments and iv) Corporate. These segments are independently and regularly reviewed and managed by the Chief Executive Officer, who is considered the CODM.

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:

FFO: net income, prior to fair value gains, net, depreciation and amortization of real estate assets, and income taxes less non-controlling interests of others in operating subsidiaries and properties 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, 2018 and 2017:

(US$ Millions)
Total revenue(1)
FFO
Three months ended Sep. 30,
2018

2017

2018

2017

Core Office
$
526

$
536

$
114

$
113

Core Retail(2)
145

—

71

113

LP Investments
1,157

974

45

79

Corporate
—

—

(107
)
(108
)
Total
$
1,828

$
1,510

$
123

$
197

(1) 
The partnership adopted IFRS 15, Revenues from Contracts with Customers, in 2018 using the modified retrospective method. The comparative information has not been restated and is reported under the accounting standards effective for those periods.
(2) 
In the three months ended September 30, 2017, the partnership had a 34% interest in our Core Retail segment, which was equity accounted.


37             


(US$ Millions)
Total revenue(1)
FFO
Nine months ended Sep. 30,
2018

2017

2018

2017

Core Office
$
1,577

$
1,591

$
374

$
408

Core Retail
145

—

300

331

LP Investments
3,374

2,966

200

205

Corporate
3

—

(313
)
(318
)
Total
$
5,099

$
4,557

$
561

$
626

(1) 
The partnership adopted IFRS 15, in 2018 using the modified retrospective method. The comparative information has not been restated and is reported under the accounting standards effective for those periods.
(2) 
In the nine months ended September 30, 2017, the partnership had a 34% interest in its Core Retail segment, which was equity accounted.

The following summaries presents the detail of total revenue from the partnership’s operating segments for the three and nine months ended September 30, 2018:
(US$ Millions)
Lease revenue

Other revenue from tenants

Hospitality revenue

Investment and other revenue

Total revenue

Three months ended Sep. 30, 2018
Core Office
$
406

$
86

$
5

$
29

$
526

Core Retail
100

29

—

16

145

LP Investments
545

85

497

28

1,155

Corporate
—

—

—

—

—

Total
$
1,051

$
200

$
502

$
73

$
1,826


(US$ Millions)
Lease revenue

Other revenue from tenants

Hospitality revenue

Investment and other revenue

Total revenue

Nine months ended Sep. 30, 2018
Core Office
$
1,207

$
265

$
14

$
91

$
1,577

Core Retail
100

29

—

16

145

LP Investments
1,623

254

1,446

51

3,374

Corporate
—

—

—

3

3

Total
$
2,930

$
548

$
1,460

$
161

$
5,099


The following summary presents information about certain consolidated balance sheet items of the partnership, on a segmented basis, as of September 30, 2018 and December 31, 2017:

 

Total assets

Total liabilities
(US$ Millions)
Sep. 30, 2018

Dec. 31, 2017

Sep. 30, 2018

Dec. 31, 2017

Core Office
$
34,631

$
33,795

$
15,696

$
16,791

Core Retail(1)
29,813

8,844

14,380

—

LP Investments
46,970

41,471

30,179

26,630

Corporate
169

237

5,570

5,802

Total
$
111,583

$
84,347

$
65,825

$
49,223

(1) 
In the year ended December 31, 2017, the partnership had a 34% interest in its Core Retail segment, which was equity accounted.

38             


The following summary presents a reconciliation of FFO to net income for the three and nine months ended September 30, 2018 and 2017:

 
Three months ended Sep. 30,
 
Nine months ended Sep. 30,
 
(US$ Millions)
2018

2017

2018

2017

FFO(1)
$
123

$
197

$
561

$
626

Depreciation and amortization of real estate assets
(70
)
(62
)
(201
)
(177
)
Fair value gains, net
556

339

1,943

717

Share of equity accounted income - non-FFO
(52
)
182

33

248

Income tax expense
37

(183
)
(49
)
(419
)
Non-controlling interests of others in operating subsidiaries and properties – non-FFO
(214
)
(305
)
(843
)
(754
)
Net income attributable to unitholders(2)
380

168

1,444

241

Non-controlling interests of others in operating subsidiaries and properties
342

491

1,352

1,269

Net income
$
722

$
659

$
2,796

$
1,510

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

NOTE 36. SUBSEQUENT EVENTS

On November 5, 2018, the partnership redeemed $330 million of Brookfield BPY Holdings Inc. Class B Junior Preferred Shares, which were held by Brookfield Asset Management.

On October 31, 2018, the partnership sold a 49.9% interest in 50 & 60 Carrington Street in Sydney.

On October 30, 2018, the partnership entered into a definitive agreement to sell its industrial portfolio in the U.S. The transaction is expected to close in the fourth quarter of 2018.

On October 18, 2018, the partnership sold its 25% interest in Jean Edmonds Towers in Ottawa.

On October 16, 2018, a subsidiary of the partnership issued medium term notes for C$100 million at 4.346% per annum and C$400 million at 4.115% per annum, with a term of five years and three years, respectively. Interests on the notes are payable semi-annually.  

On October 4, 2018, the partnership sold 100% of its interest in Queen’s Quay Terminal in Toronto.


39