How to Diversify Outside Canada for Greater Returns

Brookfield Property Partners LP (TSX:BPY.UN)(NYSE:BPY) has been a great income and total returns investment. It should particularly attract income investors because it offers a juicy yield that’s set to rise every year.

If you had invested in the stock in 2014, you would have enjoyed an income boost of 12% from the investment on a constant currency basis. However, thanks to the strong U.S. dollar, if you had opted to receive the U.S. dollar–denominated distributions in the Canadian currency, you would have seen even stronger income growth.

Currently, Brookfield Property yields nearly 5.3%, which is alluring in today’s market.

Outperforms in returns

If you’d invested $10,000 in Brookfield Property on the Toronto Stock Exchange at the end of 2013, it would have returned almost 3.8 times more income than the broader market (represented by the S&P 500). Simultaneously, the real estate owner, operator, and developer has returned 15.1%–nearly 1.8 times that of the broader market. However, U.S. unitholders wouldn’t have experienced the same success.

One reason for Brookfield Property’s above-average returns (on the Toronto Stock Exchange) is due to its large exposure to the United States. In fact, it generates about two-thirds of its revenues from the country. Since the start of 2014, the U.S. dollar has appreciated 24% against the Canadian dollar.

Other reasons include Brookfield Property’s active capital-recycling strategy and its core portfolio’s same-property growth. Both contribute to earnings growth.

Specifically, in the first three quarters, Brookfield Property earned funds from operations per unit of US$0.98–nearly 16.7% higher than the same period in 2015.

office building reaching the sky

Global exposure

Through Brookfield Property’s global portfolio, unitholders gain exposure to other countries, including the United Kingdom and Europe, Canada, Australia, Brazil, India, China, and the Middle East.

Most recently, in November, Brookfield Property acquired the International Finance Center (IFC) in Seoul, South Korea. The following is from the press release: “IFC Seoul is a premier, mixed-use 5.4-million-square-foot complex consisting of three office towers, a 400,000-square-foot shopping mall and a 434-room Conrad hotel. The property is located in Yeouido, the city’s fastest growing business district.”

It is an example of buying quality assets in excellent locations. The press release continues: “The properties comprising IFC Seoul … are tenanted by leading multi-national corporations and global retailers. The Conrad hotel is … the only five-star hotel in the district. The properties are directly connected to the Yeouido subway station through an underground pedestrian walkway.”

The takeaway

The Federal Reserve has hiked the federal funds rate by 0.25% to 0.75%. Some believe there will be as many as three more hikes in the next 12 months. Higher interest rates will increase Brookfield Property’s borrowing costs, and that’s why the units declined 2.25% on Wednesday.

Brookfield Property is a good start to diversify outside Canada for greater returns. Thanks to the pullback, investors can now buy its units at a steep discount of roughly 28% from its IFRS value. The lower the units go, the more attractive they become.

Based on its usual schedule, Brookfield Property should be increasing its distribution in February. Management aims for a distribution hike of 5-8% per year, which implies a yield on cost of at least 5.5% from an investment today.

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Fool contributor Kay Ng owns shares of Brookfield Property Partners.

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