Brookfield Property Partners (BPY) Reports 4Q13 Results

Brookfield Property Partners (BPY) reported results for the year 2013 with fully-diluted Funds from Operations (FFO) of $561 million or $1.17/unit compared to $506 million or $1.09/unit in 2012. For the 4Q13 fully-diluted FFO increased to $150 million or $0.29/unit compared to $135 million or $0.29/unit for 4Q12.

BPY was formed in early 2013 with the spinoff of the global real estate assets of Brookfield Asset Management into a separate company. Our investment thesis is the long term excellent performance under BAM will continue in the new company with the same management team, assets and value based strategy that has resulted in outstanding long term performance over the longer term.

The flat financial performance for the year and the fourth quarter is disappointing but not surprising. Good performance in the retail platform and investments in its retail and industrial platforms were offset by the expiration of a significant lease at Brookfield Place in New York that occurred in October, 2013. This is the result of Bank of America’s acquisition of Merrill Lynch during the financial crisis. Occupancy at year-end 2013 was 88.0% down from 91.1% at year-end 2012. Another contributing factor to the decline in occupancy was the acquisitions of assets with lease-up potential in Los Angeles.

BPY Collage

Accomplishments, Challenges and Solutions:

In April BPY set out to become a leading diversified owner and operator of high quality real estate assets diversified by property type and geography. It has been trading as a standalone public entity since mid-April 2013 and is about 8 ½ months into our three to five years investment horizon. Although the financial results were uninspiring a lot was accomplished and management remained focused on long term value creation through strategy implementation rather than with quarterly window dressing.

Strategy Implementation:

Since its inception Brookfield Property Partners capitalized on an opportunity to invested $1.4 billion in General Growth Properties Inc. (GGP) one of the leading premier mall operators in the U.S. increasing ownership to 32%. They diversified the property sector by investing capital to build an industrial platform with operations in North America, Europe and China. The acquisitions of Industrial Developments International and Gazeley closed in 2013, adding over 100 industrial assets consisting of 30 million square feet in the United States and Europe. In September BPY announced an initiative to acquire Brookfield Office Properties Inc. (BPO) to help accelerate its strategy.

Insufficient Float:

Since the high of $23.99/unit in May, BPY’s price below $20/unit for the most part, has been trading at a discount to its book value. We discussed this in detail in our post; “Brookfield Property Partners (BPY): What’s Going On?” [Source]. float about 3X the current float and will likely allow for more institutional sponsorship and improved unit pricing. The offer for Brookfield Office Properties was announced on February 12, 2013 [Source]. Brookfield Office Properties Board of Directors unanimously recommended the offer [Source].

At the recent BPY unit price of around $20/unit or less, the BPY units are selling at a 20% discount to their book value of about $25/unit. As the Brookfield Office Properties shareholders accept BPY shares as payment for their BOP shares they are getting $1.00 worth of equity value for every $0.80 worth of units they accept. Certainly a positive for BOP shareholders but at the initial expense of BPY unit holders because it dilutes our equity value from the yearend 2013 book value of $25.23/unit to about $24.00 after the transaction is completed. However, we agree the increased float will likely lead to more institutional ownership and rational pricing closer to book value. Then both current BOP shareholders and existing BPY unit holders will be rewarded with a $5.00 unit price increase. Not a bad tradeoff for our $1.00 short term sacrifice.

Strategy Communication:

It was interesting in the 4Q13 conference call how some analysts following BPY didn’t seem to understand the merits of the sector and geography diversification strategy. They are apparently more comfortable with sector specific strategies. It is reminiscent of the same questions Brookfield Asset Management faced before spinning off its infrastructure, renewable energy, and property segments. Management will be addressing these questions with an upcoming “analyst road show” that will hopefully provide more understanding of the strategy and lead to a larger analyst following.

Buying opportunity:

Mr. Market continues to provide us an attractive entry point. We should view these periods as a buying opportunity being extended to us by the market. Trading below book value and well below our estimate of intrinsic value in 3-5 years [Source] of about $50/unit based only on the company continuing to achieve its demonstrated past performance.

BPY’s strategy will take time to fully implement and we will likely be well rewarded for our patience in 3-5 years. In the meantime we can enjoy a nice distribution of 5%+/year while we patiently wait for the BPY story to unfold.

Pro Forma Financial Results:

BPY 4Q13 Financial Proforma

[Source] Brookfield Property Partners 4Q13 Earnings Release

Highlights

  • Increased  proposed offer to acquire common shares of Brookfield Office Properties Inc. (BPO) that BPY does not currently own. We expect to formally launch the offer in February 2014 and close the transaction in the first half of 2014.
  • Made 22 investments during the quarter, committing $2.2B of equity.
  • Investments include the acquisition of additional interests in General Growth Properties, Inc. (“GGP”) and Rouse Properties, Inc. (“Rouse”) for $1.4B, increasing ownership on a fully-diluted basis to 32% and 39%, respectively.
  • Divested of 23 investments during the quarter for net proceeds of $189M. Gross sales price of dispositions during the quarter exceeded Q3 proportionate IFRS values by $8M.
  • Executed $861M of new financings (proportionate share) with an average rate of 4.07% and a 3.14 year term and refinanced $789M of proportionate debt with an average rate of 3.54% and extended term by 5.64 years.
  • Fully-diluted FFO was $150M in the three months ended December 31, 2013, an increase from $135M in the in the prior year, primarily due to a dividend received on our Canary Wharf investment and FFO from new investments, which offset the expiration of a lease at Brookfield Place New York.
  • Significant same store growth in our retail segment and a reduction in interest expense as a result of attractive refinancings contributed to the increase.
  • Equity attributable to Unitholders increased by $1.8B from prior year-end. This increase was driven by acquisitions, primarily in our retail and multifamily, industrial and other segments, as well as valuation gains recognized during the year.
  • Equity per unit at December 31, 2013 decreased to $25.23 from $25.32 as at December 31, 2012, driven by issuances of $1.4B of limited partnership and redeemable/exchangeable units in November 2013, which was used to invest in additional interests in GGP and Rouse.

Segment Performance:

BPY 4Q13 Segment Performance

[Source] BPY’s 4Q13 Earnings Release

Distribution Declaration:

The Board of Directors declared a quarterly distribution of $0.25 per unit payable on March 31, 2014 to unitholders of record at the close of business on February 28, 2014.

Long BAM, BPY, BIP, BEP

 

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