Brookfield Property Partners (BPY) 2014 Good Result with More to Come

Brookfield Property Partners (BPY) reported a strong first full year of operations since it was spun off delivering a total return of 20.2% to unit holders for the year. Consisting of 15.2% in capital gains and 5.0% in distributions the total return compares very favorably to the S&P 500 total return including dividends of 14.0%.

As investors we need to be forward looking and behind the 2014 excellent results we find even better news. This portfolio of premier cash generating real estate assets is now positioned to continue delivering results thanks to a management team that delivers on its words. Let’s look at what was put in place for the future before turning to the past year.

Consolidating Publicly Traded Assets:

Brookfield has a long record of delivering superior returns through outstanding capital allocation and capital recycling. They use a value based approach with a vision over the full business cycle. This approach often requires going against the grain of the popular or conventional thinking of the day and necessitates the ability to react as the opportunities are presented. This is difficult to accomplish working through partially owned publicly traded companies where other stakeholders may not have the same vision or objectives.

I believe in part recognizing this, BPY set a goal early on to reduce the amount invested in public securities. In June 2014, BPY took a major step to this end and acquired the remainder of Brookfield Office Properties Inc. (BPO) it did not already own by issuing $3.3 billion of equity and utilizing a line of credit. This made BPY a much larger company with more liquidity and full control over its own destiny. Since the BPO closing on April 1 through the end of the year, BPY units delivered a total return of 26%, outperforming the S&P and the majority of its peers. Adding to this performance was increased ownership of General Growth Properties (GGP) now at 33% vs. 24% a year ago also benefitting from GGP’s improving performance and growth.

Over the past decade BPY also held a passive investment in Canary Wharf, one of the largest portfolios of class A office and retail properties in London. The 22% investment offered very little input into operations, asset management and growth potential so BPY formed a 50/50 joint venture with a strategic partner, Qatar Investment Authority (QIA) to acquire all of the shares of Songbird Estates plc (Songbird), which owns 69% of Canary Wharf Group plc. in cash. In January 2015, Songbird shareholders overwhelmingly accepted the offer, allowing the joint venture to move forward with the acquisition. With 6.4 million square feet of the highest quality office and retail assets, 11 million square feet of future residential and office development density, and enhanced transportation connectivity soon coming online via Crossrail, BPY believes “that Canary Wharf is one of the world’s most unique and special commercial projects well-positioned for significant future growth.” The acquisition is expected to close in the first quarter of 2015 and will enable BPY to move forward adding value with its strategically aligned partner QIA.

Canary Wharf

Canary Wharf

Increased Occupancy at Brookfield Place New York:

The expiration of the Merrill Lynch lease at Brookfield Place, New York in September 2013 after Merrill Lynch was acquired by Bank of America during the financial crises left a 59% occupancy rate there. BPY quickly launched a $300 million redevelopment plan that resulted in a fast turnaround and executed three million square feet of leasing in Lower Manhattan during the year. Brookfield Place New York closed the year at 95% leased, with the new retail space essentially fully committed.

Developments with Significant Lease Commitments:

BPY is starting 2015 with a number of construction ready sites in some of the world’s most dynamic markets. Rather than acquiring existing commercial real estate at significant premiums to replacement cost BPY has diverted capital to building new class A properties. The strong leasing markets facilitated the signing of 750,000 square feet of anchor leases to help launch two projects in the City of London. Total active development projects across all sectors stands at more than 19 million square feet totaling approximately $4 billion with another four million square feet for potential commencement in 2015.

Brookfield Place NY, Fashion Show Las Vegas, Multi Family, Atlantis Resort Bahamas

Brookfield Place NY, Fashion Show Las Vegas, Multi Family, Atlantis Resort Bahamas

How may all this impact us as equity owners?

BPY is well positioned to further grow cash flow from these initiatives that will start to contribute to results in 2016. Next year will be a busy transition year and the company projects annual growth in Funds from Operations (FFO) per unit of 8-11% over the next five years and announced an increase in the annual distribution growth rate target to 5-8% late last year.

Following up on the distribution target announced, BPY increased the distribution 6% in 2015 from $1.00/unit to $1.06/unit and is on track for capital appreciation over the next few years. We get paid a nice and growing 4.2% per year distribution while we accumulate capital gains anticipated to provide total returns (gains and distributions) averaging 18-20% on a compounded basis over the next five years. I don’t know about you, but I’ll be happy with those returns from a management team that has shown time and again the ability to deliver on its words.

Financial Summary:

Brookfield Property Partners (BPY) reported results [Source] for the fourth quarter 2014 and full year 2014. Funds from Operations (FFO) of $190 million ($0.27/unit) for the 4Q14 compared with $146 million ($0.28/unit) for the same period in 2013. FFO for the year 2014 increased to $758 million ($1.13/unit) versus $571 million ($1.21/unit) in 2013. The increase in FFO in the quarter was driven by the acquisition of additional interests in Brookfield Office Properties Inc. and General Growth Properties, Inc., contribution from new investments and same property growth in retail and office operations. The per unit FFO was flat due to the issuance of equity for investments and development projects not yet contributing to FFO but will drive the growth in future years.

BPY 4Q14 Financial Results[Source] BPY 4Q14 Earnings Release

Net income for the 4Q14 to unitholders was $1.492 billion ($2.09/unit) versus $190 million ($0.37/unit) for the 4Q13. Net income to unitholders for the year 2014 was $3.734 billion ($5.59/unit) compared with $995 million ($2.10/unit) in 2013. The increase in the quarter was primarily driven by fair value gains in BPY’s office and retail operations due to greater leasing activity and strengthening valuations in property markets globally.

Ric Clark, Brookfield Property’s CEO reflects continued optimism over the next several years: “I am pleased to report that 2014 was a very successful year for Brookfield Property Partners. With over 30 million square feet of leases executed across our real estate platforms, we continued to capture market rent uplifts and increased occupancy across our portfolio. In addition, we have made significant progress on our $4 billion pipeline of development projects. Most recently, we launched a successful offer to jointly acquire Canary Wharf in London with Qatar Investment Authority (QIANA). As a result of these initiatives, we have significant visible growth of our cash flow over the next five years, and we are pleased to announce a 6% increase to our distribution rate.”

Management’s Operating Results Summary:

BPY 4Q14 Operating Results

Those investors interested in the company’s very thorough explanations of the above operations by segment (Office, Retail, Industrial, Multi Family and Hotel) can find them in the February 4, Earnings Release [Source] and the 2014 Supplemental Information [Source].

Capital Recycling:

The capital allocation strategy calls for BPY to monetize mature properties in high-demand markets and redeploying this capital into more promising properties. During 2014 BPY sold interests in $2.2 billion assets, raising proceeds of $1.5 billion on valuations that surpassed 2007 pricing in many cases. The proceeds from the sales were used to pay down the BPO acquisition credit facility to $1.1 billion and to fund a portion of the $1.5 billion of new investments made during the year. Over time the recycling of capital creates value for us unitholders as the FFO yield on the new investments are greater than the FFO yield on the assets divested.

Financings and Balance Sheet:

In 2014 BPY continued to take advantage of the favorable lending environment to lower the overall cost of capital. At the asset level $6 billion was refinanced ($3 billion at BPY’s proportionate share) of property debt, lowering the average interest rate to 4.24%.

In December BPY issued $1.8 billion of preferred equity securities to QIA exchangeable into BPY units at a price of $25.70 over a predetermined period of time. This was a significant endorsement of BPY’s global strategy by QIA one of the world’s largest investment funds. The issuance will be used to fund investment in the joint bid to acquire Songbird and Canary Wharf.

Distribution Declaration:

The Board of Directors announced a 6% increase in the quarterly distribution from $0.25 to $0.265 per unit ($1.06/unit on an annual basis) and declared the quarterly distribution of $0.265/unit payable on March 31, 2015 to unitholders of record at the close of business on February 27, 2015.

Summary:

In BPY’s Corporate Profile presentation they outline a path to a net asset value of $43/unit in 5 years. We witnessed a significant step in that direction during 2014. Assuming the company trades at a minimum of 1X net asset value; the potential share price appreciation is about $18/unit. Accumulated dividends over the period will be about $5/unit to produce a gain of $23/unit or 90%+ over the next 5 years. The management team has a track record of over delivering on its targets. BPY may have significant upside potential and we can collect a nice 4.2% distribution yield while we watch this story unfold.

BPY 3Q14 Corporate Profile Value

[Source] BPY Corporate Profile

Disclosures: Long BPY, BAM, BIP, BEP

You are encouraged to do your own independent research (due diligence) on any idea discussed here because it could be wrong. This is not an invitation to buy or sell any particular security and at best it is an educated guess as to what a security or the markets may do. This is not intended as investment advice, it is just an opinion, so you should consult a reputable professional to get personal advice that meets your specialized needs of which the author has no knowledge.

Resources:

  • BPY 4Q14 Earnings News Release [Source]:
  • BPY 4Q14 Letter to Unitholders [Source]:
  • BPY 4Q14 Financial Tables [Source]:
  • BPY 4Q14 Supplemental Information [Source]:
  • BPY Corporate Profile [Source]:
  • BPY Website [Source]:

 

 

Comments

  1. Neil Gilbert says:

    Just wanted to say thanks for all the work you put into your posts. The information you provide is very in-depth, one of the best unbiased, online sources of Brookfield news, developments, and potential growth. I like the company and all it offers to investors.

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