The Brookfield group of companies recently held its 2018 Investor Day. This article touches upon the content of the Brookfield Property Partners (BPY) presentation.
What sets BPY apart from members of its small peer group is its unique ability to allocate capital into private real estate funds. Furthermore, not all peers have the expertise to modify and enhance acquired assets so as to significantly increase their value and cashflow.
- The BAM group of companies held their Investor Day on September 26th.
- BPY, the real estate arm within the BAM group of companies, operates and develops one of the largest portfolios of office, retail, multifamily, industrial, hospitality, triple net lease, self-storage, student housing and manufactured housing assets.
- What sets BPY apart from most members of its very small peer group is its unique ability to acquire and enhance acquired assets so as to significantly increase cash flow and earn outsized profits.
- BPY has achieved earnings distribution growth for 5 consecutive years since launch.
- Cash Flow From Operations (CFFO) has grown by 9% and its annual distributions have grown 6%.
- BPY has reduced its payout ratio from 90% of CFFO to its 80% target level.
- I am currently long BPY and will continue to periodically acquire units for the FFJ Portfolio AND undisclosed accounts.
At the time of my July 3 2018 ‘Get Paid to Wait for This Undervalued Company to Appreciate in Value’ article, each Brookfield Property Partners L. P. (TSX: BPY-UN) (NASDAQ: BPY) unit was trading at USD $18.96 (CDN$24.97) but BPY’s Q1 presentation indicated each unit was valued in excess of USD $30.
Furthermore, BAM’s Senior Managing Partner, CEO and Director (Bruce Flatt) specifically commented on the unit value of BPY during the BAM AGM I attended earlier this year. He indicated BPY continues to generate strong operational results and attractive returns from capital recycling initiatives from both balance sheet assets and private real estate funds.
Based on my analysis, I concluded in my July 3rd article that while the long-term outlook for BPY was attractive I had no idea when BPY would become fairly valued. I was, however, happy to accept a ~6.65% dividend yield and ended up acquiring units in for the FFJ Portfolio.
Now that the Brookfield group of companies has held its 2018 Investor Day on September 26th, I thought it would be an opportune time to revisit BPY.
BPY was formed in 2013 when BAM spun off BPY. It owns, operates and develops one of the largest portfolios of office, retail, multifamily, industrial, hospitality, triple net lease, self-storage, student housing and manufactured housing assets. Its portfolio features some of the world’s best-known commercial properties.
BPY’s Investor Fact Sheet can be accessed here.
Its investment objective is to generate attractive long-term returns on equity of 12%−15% based on stable cash flows, asset appreciation and annual distribution growth of 5%−8%.
BPY seeks to accomplish this objective by adhering to BMA’s 5 core principles:
- Acquire high quality assets
- Invest on a value basis
- Enhance value through operations
- Contrarian investing
- Large-scale and multifaceted
As with all members of the BAM group of companies, BPY continually recycles capital from stabilized assets at or near peak values into higher-yielding strategies.
What sets BPY apart from its peers is its unique ability to allocate capital into private real estate funds. Furthermore, not all companies within this small peer group have the expertise to modify and enhance acquired assets so as to significantly increase their value and cashflow.
BPY looks to double its original investment capital over the investment lifecycle and it sets a defined investment period on a per project basis; its intent is not to hold an asset in perpetuity.
Roughly 30% of its profits from its real estate investments come from current earnings with the majority coming from a realization event that typically takes place when assets are sold and a gain is realized; Investors should keep in mind that profits from these realization events are NOT included in the definition of Funds from Operations (FFO).
In aggregate since 2014, BPY has generated ~$0.9B of profits from realization events. As funds mature and investment business plans mature, BPY anticipates the pace and size of these realization events to increase.
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