An Alternative Asset Bargain – Brookfield Property Partners

In my last post I discussed Brookfield Property Partners (BPY) progress and the respectable 11% annual total return since their 2013 launch. As an alternative asset, this commercial property company attracts institutional investors looking to improve returns and diversify risk. Something we too should consider especially since BPY remains a bargain.

Brookfield Property Partners goes where the opportunities are

There’s always a bargain somewhere in the world. Brookfield Property Partners’ global footprint enables it to find global bargains that need leasing, capital, or repositioning to improve their returns.

As the footprint grew, they built an extensive pipeline of development projects in high value, supply constrained markets. And, they access Brookfield sponsored private real estate funds focused on opportunistic 18-20% total return projects.

Over the next five years the company sees growth driven by:

  1. Contribution from these active opportunistic developments;
  2. Capital recycling which is selling mature assets to reinvest the proceeds in higher return core and opportunistic projects; and,
  3. Same store growth of 2% – 3%.

BPY’s CEO Brian Kingston described the 2017 outlook in part this way: “…to expand our global investment and operating footprint. We are positioned for further growth in 2017 and remain committed, first and foremost, to delivering 12-15% long-term total returns for our unitholders.”

In 2015 and 2016 BPY executed over 20 transactions selling interests in 45 properties. In most cases sales were above book values showing the strong demand in those markets.

Transactions will continue in 2017 and, capital from BPY’s prior fund investments will generate $4 billion of capital to reinvest into new funds or core portfolios as they expand.

Their growth outlook is covered well in BPY’s Investor Day presentation, Corporate Profile, and regulatory filings.

Share price below the underlying value of the company

Since Brookfield Property Parnters’ launch the share price has trailed the company’s underlying value. For example, at today’s share price of about $22, BPY is about 25% below the $30/share net asset value of the company.

This has been an ongoing challenge for management because the lower equity price makes equity an expensive currency for transactions. They are working with investors and analysts to highlight the underlying value, prospects and potential returns.

A problem and an opportunity

The company believes the partnership structure of BPY is limiting its inclusion into major real estate indexes which limits its access to passive investment funds. So, Brookfield Property Partners is considering conversion to a U.S. Real Estate Investment Trust (REIT). The idea is the REIT structure would allow inclusion in the indexes and appeal to a broader universe of investors.

The share price will eventually catch up to the value of the company, I just don’t know when, in the meantime the shares are a bargain. Brookfield Property Partners is reinvesting in the business. This will include share repurchases if that provides the best return on capital. And, if shares are repurchased, they are purchased on the behalf of existing shareholders.

 That brings us to valuation

The dividend discount model values the stock on the anticipated stream of dividends to the shareholder. Dividends are unambiguous, real payments, made directly to shareholders not subject to accounting variations and interpretations.

The table below shows the estimated intrinsic value at the low, mid, and high target distribution growth rates and a 4% terminal growth rate. It assumes a conservative 10% discount rate (required return). Under these assumptions, Brookfield Property Partners  provides investors with the required 10% return.

BPY Intrinsic Value, $/share

BPY’s implied yield valuation

Value is also determined by BPY’s implied dividend yields.  The table below shows the implied value for a similarly composed U.S. REIT with the industry average 3.8% yield, the current yield of 5.4% and, the midpoint of 4.5%. The share price assumes BPY will trade at these yields over the range of the dividend growth rates.

Taking the midpoint of these ranges, an attractive total return of 84%, or 17% per year, over a five-year period could be realized.

BPY Implied Yield Valuation

BPY’s view of valuation

Brian Kingston, Brookfield Property Partner’s CEO concludes the Investor Day presentation with the slide summarizing the potential returns and this commentary:

  • BPY offers a compelling, unique combination of current yield and organic growth.
  • Yield backed by stable and secure cash flow from a portfolio of high-quality assets.
  • Attractive entry point at discount to IFRS value.
  • A $23 per unit investment today has the potential to offer an attractive return to shareholders.

BPY Investor Day Valuation

Investing takes time

The long term total return target remains 12% to 15% per year. The annual distribution was increased 5.4% from $1.12 to $1.18 per share in 2017. This is within the target increase of 5% to 8% annually. At today’s price of $22/share the yield is an attractive 5.4%. We get paid well to wait for the stock price to catch up to the underlying value.

While we wait, we’re in good hands under Brookfield’s talented asset management team. They know commercial real estate and have a long track record of doing what makes sense. And, with BPY we get the opportunity to invest alongside some of the savviest investors in the world.

Remember how Bruce Flatt, CEO of Brookfield Asset Management explained the GGP investment to shareholders? It seems we can apply that same perspective to our BPY shares: “In essence, we subscribe to the Berkshire Hathaway view of investing: If a business is a quality business that has an irreplaceable franchise, then one should continue to hold the investment, as compounding at significant rates of return on your capital over a long time can make shareholders very wealthy...”

I can’t promise that investing BPY today will make you very wealthy. However, I believe if you don’t invest, ten years from now you will look back at 2017 and ask, “why didn’t I hold that investment?”

Brookfield Property Partners Website

Long BPY

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