Brookfield Property Partners (BPY) 3Q14 Update: Significant Upside Potential

Sometimes Mr. Market just doesn’t get it. BPY is a global premier property company with significant upside potential over the next five years. The upside is driven by initiatives underway in its existing asset base led by a top notch management team with a track record of outstanding risk adjusted returns. BPY was spun off from Brookfield Asset Management (BAM) with a portfolio of premier cash generating real estate assets accumulated over decades under BAM.

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 began trading independently in April 2013. Our investment thesis is centered on the long term performance under BAM continuing in BPY with the same management team and value based strategy.

BPY Collage 600

BPY just reported another excellent quarter summarized below; but before we focus on this quarter let’s take a step back. Today BPY is selling for $22.34/unit, a 15% discount to its current net asset value of $26.33/unit. It is paying a 4.5% dividend in today’s low interest rate environment. The company just raised its target for dividend increases to 5%-9% per year, up from the previous 3%-5% range, reflecting management’s optimism in the company.

At its September Investor Day Presentation [Source] and its Corporate Profile Presentation [Source] BPY outlines the path to a net asset value of $43/unit in 5 years. This potential share price appreciation (about $21/unit) and accumulated dividends over the period ($5/unit) shows the potential for a gain of $26/unit or 100%+ over the next 5 years. The management team with a track record of over delivering on its targets. Last quarter the price to net asset value discount was about 20% so it is shrinking: perhaps Mr. Market is waking up.

Brookfield Property Partners (BPY) reported results [Source] for the third quarter 2014 with Funds from Operations (FFO) of $199 million or $0.28/unit up about 50% when compared to $132 million or $0.28/unit in 3Q13. The significant increase in FFO was due to the increased investments in General Growth Properties (GGP) and Brookfield Office Properties (BPO) and same store growth in GGP’s retail operations. The unit results remained the same as equity units were issued primarily for the BPO acquisition.

BPY 3Q14 Financial Results

[Source] BPY 3Q14 Earnings Release

Net income for 3Q14 attributable to unit holders was $978 million ($1.37 per unit) versus $235 million ($0.50 per unit) for the 3Q13. This substantial increase in income (316%) was due primarily to the increased in company FFO, fair value gains in BPY’s office operations due to greater leasing activity and stronger global property markets.

The CEO of Brookfield Property, Ric Clark’s comments on the quarter reflect continued optimism on organic growth prospects for the business over the next several years. And for the income oriented investor a nice surprise was an increase in the annual distribution growth target to 5%-8% up from 3%-5% previously.

“We delivered strong results in the third quarter. Given improving fundamentals in many markets and the solid performance of our real estate platforms, we remain optimistic about the strength of our financial performance. With significant organic FFO growth projected over the next several years from various initiatives, including increasing property occupancy to historical levels, capturing market rent increases on expiring leases, and completing our development and redevelopment projects, we recently increased our annual distribution growth target to 5%-8%.

Management’s Operating Results Summary:

BPY 3Q14 Operating Summary

Office Operations:

Office operations generated fully diluted FFO of $149 million for the 3Q14 compared to $91 million in the 3Q13. The $58 million increase was mainly due to the increased ownership in BPO, partially offset by the expiration of a large lease and asset dispositions.

Office operations contributed $869 million of fair value gains on a proportionate basis, primarily driven by increased occupancy and stronger valuations for office assets in major gateway markets, including New York City, Houston and Los Angeles.

Office operations contributed $869 million of fair value gains due to leasing activity and strong market conditions in the U.S. primarily in New York City. A $178 million gain was also recorded on the investment in Canary Wharf in London as it continues to establish itself as one of the business centers of the world.

In the third quarter BPY leased 3.2 million square feet of space in the core office portfolio at average net rents approximately 47% higher than expiring rents, increasing global occupancy by 90 basis points over the previous quarter to 91.7%. Significant leases executed during the period include:

  • 15-year new lease with Amazon at Principal Place in London for 432,000 square feet
  • 18-year new lease with Hudson’s Bay, the parent of Saks Fifth Avenue, for approximately 405,000 square feet at 225 Liberty Street and 250 Vesey Street at Brookfield Place New York
  • 16-year new lease with R/GA Media Group Inc. for 173,000 square feet at Five Manhattan West in New York
  • 14-year new lease with CDM Smith Inc. for 118,000 square feet at 75 State Street in Boston
  • Four-year new lease with Amazon for 94,000 square feet at Leadenhall Court in London
  • Other significant transactions include:
    • Closed the sale of 125 Old Broad Street in London for £320 million ($511 million), generating £141 million ($225 million) of net proceeds at BPY’s share.
    • Subsequent to quarter-end, closed the sale of 600 Jefferson Street in Houston for $69 million, generating $56 million of net proceeds at BPY’s share.
    • Acquired a 276,000-square-foot, premier office building in the Faria Lima district of São Paulo for $312 million with an equity investment of $197 million ($100 million of equity at BPY’s share).
    • Refinanced Bank of America Plaza in Los Angeles raising net proceeds of $189 million ($89 million at BPY’s share); new debt has a 10-year maturity with a fixed coupon of 4.05%.

Retail Operations:

Retail operations reported FFO of $117 million for the 3Q14 versus $73 million for 3Q13. The increase was due to increased ownership of GGP (now at 33% vs. 24% a year ago) and 4.7% same-store NOI growth.

Retail operations contributed $44 million of fair value gains primarily due to stronger market conditions in the United States.

Retail portfolio occupancy finished the quarter at 95.5%, consistent with 3Q13. GGP posted a strong performance, realizing suite-to-suite spreads of 17.6% on new leases.

During the quarter, transactions in the retail segment included:

  • GGP acquired a 12.5% stake in Miami Design District for an equity investment of $175 million ($51 million of equity at BPY’s share).
  • GGP acquired a 40% interest in the Shops at Bravern in Bellevue, Washington for an equity investment of $67 million ($19 million of equity at BPY’s share).


Industrial operations posted FFO of $9 million for the 3Q14 compared with $6 million in 2Q13. The increase was primarily due to the acquisition of IDI Realty, LLC in 4Q13 and a development gain in the current quarter offset by the sale of an interest in a North American industrial portfolio in the 1Q14.

  • Executed 3.2 million square feet of leasing within our industrial portfolio in the quarter, increasing occupancy to 90.4% at quarter-end.
  • Acquired the remaining 90% interest in a one-million-square-foot industrial portfolio comprised of three assets in France, Italy and Germany for approximately $41 million ($13 million of equity at BPY’s share).

Multifamily and Hotel Operations:

  • The multi-family and hotel operations posted FFO of $15 million for the 3Q14 compared with $9 million for 3Q13. The increase in FFO is largely a result of stronger performances at the Atlantis Hotel in the Bahamas and the Hard Rock Hotel and Casino in Las Vegas.
  • Atlantis’ revenue per available room increased by approximately 2.5% compared to the prior year partially offset by increased interest expense following its recent refinancing.
  • Occupancy of the multi-family operations was 94.1% at the end of 3Q14 consistent with the prior year. In-place rents increased approximately 10% in the first nine months of 2014 due to strong market conditions and rent step-ups on newly renovated units. The renovation program remains on target to refurbish a total of 2,000 units in 2014.
  • Subsequent to quarter-end, BPY closed on the acquisition of a 4,000-unit multi-family portfolio located in Manhattan for $1 billion with an equity investment of $330 million ($110 million of equity at BPY’s share).
  • Other significant transactions include:
    • Acquired four U.S. multifamily assets for $145 million with an equity investment of $44 million ($16 million of equity at BPY’s share).
    • Acquired interests in four hotels with a gross value of $881 million and an equity investment of $371 million ($76 million of equity at BPY’s share).

Distribution Declaration:

The Board of Directors has declared a quarterly distribution of $0.25 per unit payable on December 31, 2014 to unit holders of record at the close of business on November 28, 2014. Unit holders resident in the United States will receive payment in U.S. dollars and unit holders resident in Canada will receive their distributions in Canadian dollars at the exchange rate on the record date, unless they elect otherwise.


BPY has outlined in the chart below a path to a net asset value of $43/unit in 5 years. Assuming the company will trade at a minimum of 1X net asset value; the potential share price appreciation is about $21/unit. Accumulated dividends over the period of $5/unit could produce a gain of $26/unit or 100%+ over the next 5 years. The management team has a track record of over delivering on its targets. The price to net asset value discount is shrinking; perhaps Mr. Market is waking up? BPY may have significant upside potential and we collect a 4.5% distribution yield while we wait.

BPY 3Q14 Corporate Profile Value

[Source] BPY Corporate Profile

Disclosures: Long BPY, BAM, BIP, BEP

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