Brookfield Property Partners (NASDAQ: BPY) is a more than $8 billion commercial real-estate company that focuses on investing and renting out commercial assets. The company has an incredibly substantial portfolio of assets that supports the company’s dividend of almost 7%. As we’ll see throughout this article, the company’s substantial portfolio of assets and their growth potential justify this company as a long-term real-estate investment.
Brookfield Property Partners Asset Overview
Let’s start with an overview of Brookfield Property Partners’ asset portfolio.
The company’s core business represents 85% of its balance sheet and consists of a massive 136 premier office properties and 123 retail properties totaling over 200 million square feet. These assets are worth almost $70 billion and include some of the best known properties in the world. This includes properties such as Canary Wharf in London, the Fashion Show in Las Vegas, and Brookfield Place in New York.
Additionally, the company has 13 million square feet of development projects underway, representing mid-single digit growth in the company’s asset portfolio. The company is continuing to focus on minimizing tenant concentration and a high quality and global tenant base. Minimal tenant concentration along with new development projects will help increase shareholder revenue while de-risking cash flow. The potential for shareholder revenue growth is discussed in future growth opportunities.
The company’s massive asset portfolio here also supports strong shareholder equity. The company’s $72 billion in assets supports total equity attributable to unit holders of $27.5 billion. Given the company’s current market cap of $18 billion, the company’s net equity (i.e. book value) helps to show the company’s undervalued asset portfolio.
Additionally, the company’s LP investments represent 15% of its balance sheet. The company has a variety of interests in a number of different funds that invest in a variety of different properties. The company’s LP goals are to be able to acquire high quality assets at a discount to replacement cost or intrinsic value and then use these to get opportunistic income.
It’s a way for the company to get returns without needing to do all the property management and associated work itself, by solely chasing discounted properties.
Brookfield Property Partners Recent Accomplishments
Brookfield Property Partners has an impressive asset portfolio and the company has recently made a number of recent accomplishments in high-grading its portfolio. High-grading a portfolio is something incredibly exciting to me, especially as I see more and more companies doing it, it allows incremental and opportunistic improvements to existing assets to generate high returns.
Brookfield Property Partners Recent Improvements – Brookfield Property Partners Investor Presentation
One example of this is the company’s recent New York residential portfolio improvements. The company acquired these apartments in October 2014 for a total of $790 million. Since then, the company has spent $80 million in renovation capital to renovate a total of 1600 apartments. That’s roughly $50k / apartment – a fairly small amount in New York City.
The company has done similar high-grading across other aspects of its portfolio. For example, at 1 Manhattan West, the company has finished a state of the art office tower with a September 2019 completion date. The tower has 2.1 million square feet and is currently 86% leased out. The total cost was $1.9 billion with a 6% yield on cost – however, the stabilized value is $2.9 billion meaning a $1 billion unrealized gain.
100 Bishopsgate was another major project by the company completed in December 2019. The 1 million square foot project is a major London office building and 83% leased. The total cost was 800 million pounds and the stabilized value was 1.5 billion pounds, for another building with a 1 billion USD net gain.
Additionally, the company’s yield on cost here is 7.9%. Brookfield Property Partners’ long-term real estate investments and their strength is clearly shown here. Borrowing money from a 3% mortgage and investing at almost 8% means an almost 5% net benefit for the company. Multiply that across $10s of billions and you have secure long-term cash flow.
More so, if these buildings continue doubling in value, that means billions in immediate potential value for shareholders.
Brookfield Property Partners Future Growth Opportunities
Past Brookfield Property Partners’ recent accomplishments, the company also has a significant number of future growth opportunities.
Brookfield Property Partners Near-Term Projects – Brookfield Property Partners Investor Presentation
The above highlights the company’s near-term projects. The company is projecting to spend $2.5 billion across a variety of projects here. These projects all have a yield on cost ranging from 5.1% to 9.2% at the high end. These projects are significant because they’re also, additionally, expected to generate a massive $775 million worth of value. To put these in terms of numbers for investors, here’s what we get.
The weighted yield on cost across all of these projects (focused across the major Ala Moana Center in Honolulu, HI, which is the largest project at $1.2 billion) is 6.19%. The resulting cash flow for investors is $155 million. The company’s interest rate here is roughly 4.3% meaning roughly $108 million in annual interest expenses for the company from funding these projects.
As a result, from this investment, the company will generate a net $47 million in annual cash flow. On top of this, the company will generate $775 million worth of value in properties for investors. That spread is massive for investors – the company can do this with $10s of billions to generate values. In fact, with the annual dividends of roughly $583 million, it can increase dividends by almost double-digits from these projects.
Brookfield Property Partners Growth Projects – Brookfield Property Partners Investor Presentation
Past this, the company has a number of long-term projects. The company’s largest project is Stonestown Galleria, a $1.7 billion project with short-term Nordstrom and Macy’s box developments and the long-term potential to unlock 2400+ units. The weighted yield on cost across these projects is 6.2%, with the potential for $162 million in interest and $1.0 billion in value creation.
Again, we can see how strong the company’s long-term projects are – the weighted yield is the same as the short-term projects, but the value creation is more significant. As a result, the company will once again, after subtracting interest, generate more than $50 million in net annual cash. That is also enough for an almost double-digit yield increase not counting the massive $1 billion in new value.
As we can see from Brookfield Property Partners, the company is focused on generating strong shareholder rewards. The growth from these projects will enable it to increase dividends. As we can see, this is a strong company, with a strong asset base, and strong potential to reward shareholders.
Brookfield Property Partners Risks
Despite these strong assets, Brookfield Property Partners does have some risks worth paying attention to. The primary risks for Brookfield Property Partners are the spread on interest rates along with the incentive to increase distribution.
The interest rate based risk is based on what we discussed above. The company’s income comes from the spread between the company’s yield on cost and mortgage rates. The company invests $10s of billions into that spread and as a result, its cash flow depends on that spread. However, if interest rates go up, and rents don’t, a 1% interest rate increase could cut income by half.
The exact amount of risk here is difficult to quantify as it depends on the timing of interest rate increases versus the timing of rent increases with the hidden factor that higher interest rates could drive done property prices. As discussed above, a 1% interest rate increase could theoretically cut income by half. I expect this would only last 2 years as a 1% interest rate increase wouldn’t happen instantly.
Looking at aggregation of the last 10 times interest rates have increased by 1% or more, the average total return increase was ~10%. This is likely a confounding variable due to interest rates only going up in a positive market and could actually point as a positive to the company. However, in the short term there was a 50% chance of a decrease in property value and a 30% chance of a decrease in NOI. These could push off the company’s dividend increase plans by a year or two.
Brookfield Property Partners Management and Incentive – Brookfield Property Partners Investor Presentation
The second risk is due to Brookfield Property Partners fees to its management company, Brookfield Asset Management. The company has a management fee and an incentive distribution that it has to pay on a quarterly basis. The company had to pay a total of $32.6 million in management fees and a $13.7 million incentive distribution (offset by $133.4 million in credits that’ll last another 3 years at this rate).
That means the company’s quarterly expenses are just over $46 million. In retrospect, as we saw based on the value of the growth projects above, that means $2.5 billion in projects to account for just the management fee and incentive distribution. More importantly, as the company’s distribution increases, this places an overhead on further increases. That means less increases going forward or more pressure to increase past what’s sustainable to pay more fees.
Either way, this could pose a risk to the company.
Brookfield Property Partners is a great way to invest in real-estate for the long term. Unfortunately, the benefit of real-estate where you directly can borrow money at a 3% dividend and invest it in real-estate at a higher yield isn’t available. However, the company does that for you investing $10s of billions into real estate at a more than 6% yield and borrowing money at just over 4%.
That has led to the company’s dividend yield of almost 7%, which should continue to increase for the long term going forward. The company has some risks as a result of its reliance on borrowing money at low interest rates along with management fees to Brookfield Asset Management that are worth paying attention to, however, overall, the company is a quality long-term investment.
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Disclosure: I am/we are long BPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.