Global real estate giant Brookfield Property Partners LP (TSX:BPY.UN)(NYSE:BPY) is building a powerful real estate platform. Through a combination of investments in stable core properties and higher-return, opportunistic strategies, the company believes that it can grow its earnings by an average of 8-11% per year, enabling it to increase distributions to investors by 5-8% per year.
Because of that growth and the miracle of compound interest, Brookfield believes that just by executing its current plan, it can turn a $23 investment today into at least $77 in cash flow and capital appreciation in 10 years. Here’s how it gets to that number.
A growing stream of income
The foundation of Brookfield is a portfolio of core office and retail properties. The company currently controls 149 premiere office properties spread around the globe along with 128 class-A retail malls in the U.S. The core office properties are 92% leased to an average term of 8.3 years, while it has 95% of its retail space occupied. This strong occupancy provides the company very stable income, which it uses to fund its lucrative 4.9% distribution.
Looking ahead, Brookfield believes that it can grow that payout by a minimum of 5% per year via a combination of increased rents and occupancy as well as several redevelopment projects currently underway. For example, same property net operating income at Brookfield Place New York has grown by nearly 14% over the past year due to recently signed leases and increased occupancy. Meanwhile, redeveloping obsolete big-box stores has generated an 11% annual return in the company’s retail portfolio over the past five years.
The math here is pretty compelling. If Brookfield can indeed grow its payout, which is currently $1.12 per unit annually, by 5% per year, it projects to return a total of $16 per unit in cash to investors over the next 10 years. That is a pretty lucrative return on the less than $23 per unit it would cost investors to buy units today.
Unlocking the value of real estate
In addition to that growing income stream, Brookfield believes it can grow the value of its real estate portfolio by at least 8% per year. Driving that growth are several development projects currently in the pipeline. In its core office portfolio, for example, the company has $4.2 billion of properties under development, which should produce $300 million of annualized operating income once fully leased. In addition, the company is building a core portfolio of urban multi-family properties with $2 billion in projects currently under development.
Another driver of value creation is the company’s growing portfolio of opportunistic assets, which are high-quality assets that were either acquired at a significant discount or have value-add potential. For example, the company bought seven office properties in Brazil at a 40% discount to replacement value due to the country’s current economic issues. Those Brazilian assets in particular have tremendous cash flow and value upside as the company leases out the remaining space once the Brazilian economy recovers.
Overall, the company has invested $4 billion in opportunistic real estate assets via private equity funds managed by parent company Brookfield Asset Management Inc. Brookfield believes that these investments can deliver 20% annual returns as it repositions the assets and then sells them in the future.
Add it up, and Brookfield believes that it can grow its asset base by at least 8% per year as its development projects come online and the opportunistic investments pay off. By its account, that puts the future value of its real estate portfolio at $61 per unit, which includes the current market value of $23 plus $38 of future appreciation should it hit the low end of its target and grow the earnings power of its asset base by 8% annually.
Brookfield Property Partners offers investors a pretty compelling combination of growth and income. Based on the current value of units at just under $23, investors have the potential to collect $16 per unit in cash flow over the next decade via distributions and another $38 per unit in capital appreciation as the company executes its organic growth strategy.
Add it up, and that is $77 a unit, which would mean an investor can more than triple their money over the next 10 years by investing in Brookfield Property Partners today.
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Fool contributor Matt DiLallo owns shares of Brookfield Asset Management and Brookfield Property Partners. Matt DiLallo has the following options: short December 2016 $22.5 puts on Brookfield Property Partners. The Motley Fool owns shares of BROOKFIELD ASSET MANAGEMENT INC. CL.A LV. Brookfield Property Partners is a recommendation of Stock Advisor Canada.