Brookfield Property Partners (BPY) Well Positioned

Brookfield Property Partners (BPY) is a leading global commercial property company with operations that include premier office, retail, multi-family, industrial and hotel assets. The company was spun off from Brookfield Asset Management (BAM) and began trading independently early in 2013 with a 23 year pro forma history of 15.4%/year total returns.

BPY 150

After reaching a high of $23.99 per unit a month after the spinoff in May 2013 the units have been trading at a significant discount to the current book value of about $25 per unit. The underlying issues and the pending solutions were discussed in a previous post [Source] and summarized below:

1. Time is needed for the market to absorb and understand the value proposition.

It’s not unusual for recent spinoffs to drop in price before the market begins to understand the value proposition. Some recipients of the spun off company do not keep the shares and it takes time for analyst to cover the company and get the word out. Just a couple of reasons our investment time frame is 3-5 years. As an example, after the Brookfield Infrastructure (BIP) spinoff in 2008 the price dropped, helped along by a falling market, but the patient investors  that held the units were well rewarded and likely will be for years to come.

2. Insufficient float for institutional buyers and indexes:

The largest sources of buying and selling are large institutions such as mutual funds and pension funds. The price of a stock (not the value) simply follows the laws of supply and demand. As the demand for shares increase so does the price and when demand falls the price weakens. Institutions have significant buying power so if they view BPY as an attractive investment (as I think they must) they will increase demand and price when they buy.

Institutions also require sufficient trading volume, to be able to buy and sell without unduly affecting the price. Without sufficient volume (or float) the large institutional buyers are reluctant to buy even if they view a company as an attractive investment. As an example, if the average equity mutual fund with a little over $1 billion in assets wants to take a typical 2% position (in Brookfield Property Partners) they must invest $20 million in the company.  At BPY’s trading price of $20 per unit that is 1 million units and at BPY’s average 3 month trading volume of about 100,000 units per day that’s the equivalent to 20 full days of trading volume or about 100% of a month’s volume. It would take months to establish the desired 2% position without affecting the supply and demand of a stock and the price excessively.

Horizon Kinetics’ value investor Murray Stahl Commented in Value Investor Insight;  “…BPY owns trophy assets that would stand up well against any entity held by an index of commercial real estate investment trusts. But it isn’t included, or included in only a small way, because BAM still owns 90% of it and the float isn’t sufficient for the index. So the value-realization catalyst of the spinoff for both BAM and BPY has so far been much less operative than it would have been in the old days.”

3. Good management is the catalyst:

Assuming a viable business exists, good fundamental performance through solid management is the only “catalyst” really needed to increase the intrinsic value of a company over time. The market price eventually follows.  However, like in chemistry, an additional catalyst to make things happens sooner and more completely is always nice and BPY’s management is providing that additional catalyst.

Brookfield Property Partners announced [Source] a proposal to acquire Brookfield Office Properties (BPO) in a tender offer for all of the common shares it does not currently own.  BPY also announced [Source] that it has agreed to acquire additional shares and warrants of General Growth Properties (GGP) for total consideration of $1.4 billion.

Following completion of the BPO and GGP transactions the public float of Brookfield Property Partners will increase to over $5 billion from about $1.6 billion for a threefold increase. This is a huge step to increase the public float and trading volume.

Management Delivers:

On April 1, 2014 Brookfield Property Partners announced [Source] it completed the successful tender offer for the additional common shares of Brookfield Office Properties.

The six month graph below shows the volume increase in units traded commencing with the BPO acquisition. The average 3 month trading volume of about 100,000 units per day before the transactions has increased to about 680,000 units per day and has continued to increase with the 10 day average currently at about 950,000 units per day.

BPY Trading Volume Graph 042114

On March 28, 2014 Brookfield Property Partners announced [Source] “that the S&P Dow Jones Canadian Index Services will add Brookfield Property Partners to the S&P/TSX Composite Index, the headline index and principal broad market measure for the Canadian equity markets, after the close of trading on March 27, 2014.

Brookfield Property Partners will also be added to the S&P/TSX Composite Dividend Index and the S&P/TSX Capped Real Estate Index.

The Partnership also confirmed that Global Property Research will add Brookfield Property Partners to the GPR 250 Index, a weighted index based on shares of 250 leading property companies in the world, as of April 1, 2014.”

More Steps Underway:

In a March 19 & 20 presentation [Source] during a Los Angeles Investor Tour Brookfield Property Partners outlined steps underway to close the discount to book value in part:

  •  Brookfield is very focused on closing the gap
    • Has $12 billion of equity invested in BPY
    • Must reduce BPY’s cost of equity in order to use its currency to fund growth on an accretive basis
  • We are pursuing the following strategies to narrow the discount:
    • BPO merger which will increase direct ownership of assets and increase public float
    • Capital recycling program
      • Realizing gains relative to IFRS book value should establish greater credibility of IFRS value
    • Increasing BPY’s FFO yield by:
      • Selling or restructuring non-productive assets that do not produce near term FFO
      • Reducing drag from land positions by monetizing through sales or JVs, where advantageous
      • Increasing BPY’s fee income from managing assets for institutional partners
      • Reducing BPY G&A
    • Increasing analyst coverage: targeting coverage by 8 to 10 analysts in next 12 months
    • Seeking inclusion in indices; TSX is most likely in the near-term
  • Furthermore, BPY will consider buying back units following the close of the BPO acquisition

BPY’s management suggested in the above presentation it can offer investors the opportunity to earn a ~20% per annum return over the next five years. This level of outstanding returns are similar to the company’s long term return record and it is encouraging to see management challenge themselves to continue this outstanding performance for the owners of the company.

Brookfield Property Partners will release its 1Q14 earnings and hold the earnings conference call on May 1, 2014 where we’ll get an update on the progress underway. The company remains well positioned to deliver outstanding risk adjusted returns to the patient investor. Nothing has transpired to change our estimate of  intrinsic value ($50 per unit in 3-5 years) and the company remains a buying opportunity.

Disclosures: Long BPY, BAM, BIP, BEP

 

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