Brookfield Property Partners
LP (BPY, $23.33): “Strong Fundamentals
& Contrarian Investments Driving Outsized Returns for BPY”
By: Joe Flynn,
AIM Student at Marquette University
Disclosure: The AIM Equity
Fund currently holds this position. This article was written by myself, and it
expresses my own opinions. I am not receiving compensation for it and I have no
business relationship with any company whose stock is mentioned in this
article.
Summary
•Brookfield Property Partners LP (NYSE:
BPY) is Brookfield Asset Management’s (68% OS) primary vehicle for property
investing globally. The company owns and manages an attractive real estate
portfolio consisting of high-quality, trophy-like assets and conducts
investments within three segments; Core Office, Core Retail, and
Opportunistic.
•Consistent FFO growth, and 5% yield have
made little to no impact on its average 28% discount to NAV. REIT Conversion on
hold for now.
•Capital recycling efforts currently at the mid-point of $100-200M target, flexibility
encouraging investment in opportunistic strategies with strong return
potential. Continued unit buybacks a plus.
•High-quality Core Office & Retail assets leading to stable cash flows.
Making good progress adapting to pressured retail space, and opportunities in
low-valuation environment will lead to continued involvement. Deployment
pipeline and lease momentum driving meaningful growth in office portfolio.
Key points: Brookfield Property Partners operates as a
limited partnership and has upheld a strong track record of generating returns
through its value-oriented investment approach. After reporting 2Q17 earnings,
BPY continues to show its strength despite a pressured retail space. BYP
increased FFO 2% in 2Q, which makes the 9th consecutive quarter of YoY
FFO growth. The company also has maintained consistent same store growth in the
range of 2-3% and has grown annual distribution in line with the target of
5-8%. The current 5% yield is backed by solid cash flows from the retail and
office core portfolios. The opportunistic portfolio has begun to show its high
return potential as well, with now over $5.2B invested (20% of assets).
Over
the past year, it was unclear whether BPY would continue their LP. or decide to
pursue a REIT conversion. At BPY’s Investor Day in September it was confirmed
that the firm is no longer actively pursuing REIT conversation, but was not
ruled out entirely. The current LP structure allows BPY to continue recycling
capital without major restriction.
Through
its capital recycling efforts, BPY raised $825M of equity capital in the first
two quarters of 2017, and additional $815M is expected from asset sales during
the 3Q. Recently, a larger portion of recycled capital has been allocated to
its opportunistic fund to capitalize on mispriced assets with operational
upside. The opportunistic fund invests in high-quality, globally diversified
private equity sponsored funds that generally earn +20% returns. The portfolio
should continue to grow to $7M assets by 2018 and self-fund future investments
in similar strategies. The company also
put capital to work to buy back $253.7M worth of units during 2017, reducing OS
by 4%. The undervalued share price will likely lead to continued focus on
buybacks in upcoming quarters.
Retail is the most hated investment space
today, and negative headlines continue to dominate. As contrarian investors,
BPY sees the negative sentiment as an opportunity to invest further. BPY has
payed close attention to the challenges/trends facing retail, and has adapted
its core portfolio accordingly to remain 95% occupied. BPY has yielded 8-10% by
redeveloping traditional department store locations into higher revenue
generating uses such as entertainment, restaurants, and omni-channel stores. BPY
has also capitalized on e-commerce brands that are expanding to brick-and-mortar
to widen customer base, and signed leases with retailers Bonobos, UNTUCK it,
and Warby Parker. The company recently increased its position in General Growth
Properties to 34% OS.
In
addition, APY’s core office portfolio continues to be one of the most highly
regarded, and premier office portfolios in the world. BPY’s active deployment
pipeline with expected deliveries of $7.5M SF should meaningfully impact NOI
going forward. Leasing momentum has also picked up this year, most notably for the
Manhattan West Development Site. In 3Q, BPY signed leases with Amazon and EY
bringing the tower to 82% pre-committed.
What has the stock done
lately?
The
only major movement in the past couple months occurred on October 4th,
where the stock jumped 5.5% in one trading day to $24.80 following an article
published by Reuters. It was reported that BPY was considering a partial sale
of its Northeastern Office portfolio for $10B. BPY has been able to take
advantage of high valuations by selling certain core properties, but since the
stock declined to its current level today.
Past Year Performance:
BPY
has been able to perform well in the wake of the market’s deterioration of its
retail portfolio. Retail represents approximately ½ half of invested assets,
and 34% interest in GGP continues to affect sentiment. Despite the retail
portfolio being off by over 20% YTD, the shares have still managed to rise by
6%. The stock has also outperformed the MSCI US REIT index by 4%. The LP
business model makes the stock a unique real estate vehicle, but is not widely
followed and excludes billions of $$ in index money from chasing it.
Source: FactSet
My Takeaway
Finding
a real estate company with superior assets that are globally diversified like
BPY’s core portfolio is hard to come by. The shares still trade at a 23% percent
discount to its $29 NAV, but management’s involvement is encouraging, and the buyback
should set a floor for the stock at around $23 in the meantime. The company’s
strong FFO growth and 5% yield has yet to narrow the discount gap, but supports
future capital appreciation of its stock when retail turns around. It may take some time to play out but returns
of +20% in opportunistic strategies give BPY strong risk/return characteristics
and will complement stable cash flow from the core portfolios. Management is
targeting after tax returns of 12-15% per year on its invested capital looking
forward. It is recommended BPY is held in the AIM fund with its original target
price of $28, and offers outsized-return potential in today’s benign
environment.
