Brookfield Property Partners (BPY) 2Q13 Results

Brookfield Property Partners (BPY) reported the first earnings release since their launch as a public company in April 2013 [Source]. The 2Q13 results are compared to the operating results and the capital structure of the real estate investments before the spinoff that were carved out of Brookfield Asset Management. These “pro forma” results provide a meaningful basis for comparison against the prior period results.

BPY Collage

Since our last post was on BPY was April 15, 2013 [Source] we didn’t expect any major changes or surprises and there were none. Results are pretty much in line with expectations.

The company reported:

  • Funds from Operations (FFO) increased by 7% to $126 million or $0.27 per unit in the three months ended June 30, 2013, compared to the quarter ended June 30, 2012.
  • Excluding one-time items, FFO for the period was $132 million ($0.28 per unit) compared to $118 million ($0.25 per unit) in the comparable prior-year period.
  • Net income was $277 million or $0.59 per unit for the quarter ended June 30, 2013, compared with $288 million or $0.62 per unit in the prior year period. The decrease was a result of significant valuation gains in the prior year partially offset by the increase in FFO in the current period.
  • Total Return of $323 million or $0.69 per unit during the three months ended June 30, 2013, compared to $338 million or $0.72 per unit in the prior year, as a result of significant fair value gains in General Growth Properties (GGP) in 2012.
  • Equity per unit 2Q13 increased by $0.32 to $25.64 from $25.32 compared to prior year-end, driven by acquisitions and fair value gains in 2013, offset by fluctuations in foreign exchange rates.

Pro Forma Financial Results:

2Q13 Financial Results

Management is optimistic about the opportunities they are seeing in all sectors. “We are excited by the opportunities we are seeing in all sectors as we believe there are unmatched prospects for organic growth and acquisitions at attractive valuations,” said Ric Clark, Chief Executive Officer. “With the U.S. economic recovery gaining strength and Europe still in flux, we are poised to invest in best-in-class diversified property assets, utilizing our global reach, platforms and capabilities to grow Brookfield Property Partners into the world’s leading commercial real estate company.”

During the conference call analysts questioned management’s view of the BPY share price (currently at about $20.40/unit) trading at a 20% discount to its net asset value of $25.64 per unit. The concern seemed to center around the discount implications to BPY’s investing activities as unit holders don’t want units representing $1.00 worth of assets to be issued to purchase assets with $.80 of value.

This is an unwarranted fear as the Brookfield Companies built their track record on prudent capital allocation. In time Mr. Market will understand the value proposition of BPY and the discount will disappear. Until then, management has plenty of access to funds and through capital recycle. They can sell non-core or fully valued asset sales for cash to purchase higher return prospects in the opportunistic manner they always have. For example, subsequent to quarter end BPY closed the $4.4 billion Brookfield Strategic Real Estate Partners Fund where BPY serves as the cornerstone investor with a $1.3 billion commitment.

When will the discount disappear? No one knows but we can rest assured BPY’s management, if decades of outstanding performance are any indication, will invest our money alongside their money to achieve their total return target of 12-15%, or they will not invest it. What is the catalyst for the discount to disappear? I’m counting on the one perpetual catalyst that has served companies like Brookfield and Berkshire Hathaway well for decades: outstanding performance through prudent capital allocation.

Eventually Mr. Market recognizes a good thing and will close the discount. In the meantime the company is on sale at a enormous 60% discount to our intrinsic value estimated of about $50/unit in five years. The bonus is we are getting paid a strong 4.9% dividend yield in this historically low interest rate environment while we wait.

Management continues to work on our behalf announcing the following transactions in 2Q13 announced:

Brookfield Property Partners, directly or through affiliates, acquired seven real estate assets totaling approximately $1.0 billion and disposed of eight real estate assets totaling approximately $890 million, generating approximately $110 million net proceeds (at share) during the second quarter of 2013.

Highlights from the quarter include:

Office

  • Advanced on MPG Office Trust acquisition following a vote in favor of the transaction by MPG common shareholders, subsequent to quarter end
  • Completed Hammerson portfolio acquisition in London with closing on 125 Broad Street and Leadenhall Court
  • Commenced development of second tower of Brookfield Place Perth in Australia with completion expected in late 2015

Retail

  • Sold a 49.9% interest in both The Grand Canal Shoppes and The Shoppes at the Palazzo, two Class A malls in Las Vegas, NV
  • Divested two non-core retail malls for $138 million

Multi-family

  • Completed over $54 million of value-add multi-family acquisitions in the U.S.

Industrial

  • Acquired EZW Gazeley, a UK based industrial real estate company, for £323 million
  • Agreed to acquire Industrial Developments International from Kajima of Japan for $1.1 billion, subsequent to quarter end

Dividend Declaration

The Board of Directors of Brookfield Property Partners declared a quarterly common unit dividend of $0.25 per unit payable on September 30, 2013 to unit holders of record at the close of business on August 30, 2013. The dividend, calculated for the period from June 1, 2013 to August 31, 2013, represents an annualized dividend of $1.00 per unit.

Long BAM, BPY, BIP, BEP

BPY 2Q13 References:

  • 2Q13 Earnings News Release [Source]
  • 2Q13 Financials [Source]
  • 2Q13 Supplemental Information [Source]
  • 2Q13 Conference Call Recording [Source]
  • 2Q13 Conference Call Transcript [Source]
  • Brookfield Property Partners Website [Source]

 

 

Comments

  1. Hello George,

    I just wanted to check up if you had any updated thoughts on BPY post the BPO offering? I can see the value proposition clearly for BAM however the price action in BPY continues to disappoint.

    Thanks!
    LCT

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