Soon after the United Kingdom decided to exit the European Union, the currency and public equity markets felt the blow. The pound depreciated, and companies with exposure to Europe or the U.K. fell. The companies that fall temporarily are the high-quality companies, including Brookfield Property Partners LP (TSX:BPY.UN)(NYSE:BPY).
Although the long-term effects of the U.K.’s decision to exit the E.U. have yet to be seen, the brave souls who bought Brookfield Property after the 7% dip due to the U.K. referendum would have seen their units appreciate 10% or so in a little over a month.
As an example showcasing Brookfield Property’s quality assets, its London office portfolio is 98% leased with an average remaining lease term of over 11 years. Further, less than 15% of its leases expire over the next five years.
Hedging
Brookfield Property made efforts to minimize short-term volatility. At the end of June the company had over 80% of its assets hedged against the pound. With only about 5% of its equity exposed to the currency, the company is largely insulated from these short-term impacts.
Safer distribution
In the second quarter Brookfield Property’s funds from operations (FFO) per unit were $0.35–a 25% increase over the same period in the previous year. The growth was due to new investments made within the last 12 months and higher net operating income from recently signed leases in its core office portfolio, among other reasons.
Since cash distributions are paid out from FFO, a higher FFO implies a safer distribution. In the same period last year, Brookfield Property’s FFO payout ratio was over 94%. This quarter the company’s payout ratio was 80%.
Capital recycling for higher returns
Year to date, in the U.S., Europe, and Australia, Brookfield Property has sold mature assets, which largely had cap rates of less than 5% for net proceeds of US$1.5 billion. Brookfield Property sold these assets at or above their IFRS values, indicating that the IFRS value per unit should be a good indicator of the underlying value of the company.
The sale proceeds are used to fund new investments and development activities to generate higher returns. This year the company could surface another US$0.5 billion from these types of assets for higher returns.
Conclusion
The Brexit scare caused a 7% dip in Brookfield Properties’s unit price in the short term. In over a little more than a month, the units have more than recovered.
However, at the end of June Brookfield Property’s IFRS value per unit was US$29.75, which indicates the company is discounted by about 17%. So, income and total-returns investors alike should still find value in the company today as Brookfield Property yields about 4.5%.
