Brookfield Property Partners LP (TSX:BPY.UN)(NYSE:BPY) is 10% higher than it was a year ago. That aligns with average market returns, but let’s not forget that it paid an above-average yield north of 4% on top of the price appreciation.
Quality companies that become more profitable and valuable will appreciate higher over time. Here are several reasons Brookfield Property will head higher.
Global portfolio of quality assets
Brookfield Property is one of the largest commercial real estate companies. It has more than $66 billion in total assets and invests internationally.
Its core portfolio has about 150 premier office properties and 128 best-in-class retail properties that make up about 85% of its balance sheet. Brookfield Property targets total returns of 12-15%.
The rest of the company’s portfolio are opportunistic investments that target 20% total returns. These investments include multifamily, triple net lease, industrial, hospitality, and self-storage assets.
Growing distributions
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 healthy cash distributions come from FFO, a higher FFO implies a safe distribution. Additionally, Brookfield Property’s FFO payout ratio for the second quarter was 80%, which provides a greater margin of safety compared to the payout ratio of over 94% in the same period last year.
The company also increased its distribution per share by almost 5.7% this year.
Capital recycling
Year to date 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 IFRS values.
The sale proceeds were used to fund new investments and development activities to generate higher returns. These investments included core office and retail assets, such as a 50% interest in a 766,000-square-foot office development in Washington, D.C., which is 70% pre-let, and opportunistic investments including more than 5,600 student housing units in the U.K. and 33 self-storage properties with 18,500 units in the U.S., among others.
Valuation
According to Brookfield Property’s IFRS value per unit at the end of June, the company is worth US$29.75 per unit. The company is undervalued by about 17%.
Buybacks
If Brookfield Property continues to find value to do so, the company can continue buying back its units. In the second quarter Brookfield Property bought back US$7.5 million worth of units for cancellation at an average price of US$21.99 per unit. Any buyback efforts by the company will help reduce the outstanding unit count and increase the stakes of unitholders.
Conclusion
Quality companies tend to head higher as they become more profitable over time. I believe that’s the case for Brookfield Property, which has a premium international portfolio of commercial real estate assets, from which it generates a stable cash flow.
The company uses a percentage of its portfolio for opportunistic investments that targets higher returns. In each of the last few years, unitholders saw their cash distributions grow, and that trend is likely to continue with the company-distribution-per-unit growth guidance of 5-8% per year.
