What an incredible opportunity this is to get a safe +7% yield from Brookfield Property Partners (TSX:BPY.UN)(NASDAQ:BPY) stock for your RRSP account!
The high yield is partly thanks to the more than 11% retreat of the stock, as it reported its first-quarter results, as well as the stock’s tendency to increase its dividend every year.
How Brookfield Property is able to pay out a high yield and an increasing dividend
BPY has a combined strategy of owning, operating, and developing a diversified global real estate portfolio, as well as selling assets to maintain its high dividend yield and dividend increases.
The company has about 80% of its balance sheet in a core office and core retail portfolio that generates stable cash flows and targets total returns of 10-12%.
The rest of its balance sheet consists of a portfolio of mispriced properties and/or properties with significant value-add, such that the experienced BPY team can improve on the assets and either get higher rental income from them or sell them at a higher valuation in the future.
For this portfolio, BPY aims for whopping total returns of 18-20%, which come from cash flow generated from the assets as well as sales of mature assets.
Brookfield Property reported its first-quarter results on May 9. It generated funds from operations (FFO) and realized gains of US$367 million for the quarter, which was 37% higher than the period a year ago. However, on a per-unit basis, it only stayed flat at US$0.38, which indicated some dilution with its acquisitions. Still, the end result was a Q1 payout ratio of 87%, which was more than sufficient to cover the cash distribution.
We get a glimpse of the health of BPY’s individual business segments from looking at the year-over-year changes in their FFO generation.
In the first quarter, the core office segment generated FFO of US$140 million, down 8.5% compared to the same period in the prior year. The FFO decline was due to higher interest rates and the negative impact of a stronger U.S. dollar, which the company can’t control.
However, the quality assets and the team’s expertise led to 4.2% same-property net operating income growth, and BPY was able to sign leases at rents 16% higher on average than leases that expired in the period.
The core retail segment generated FFO of US$184 million, up 59% year over year thanks to the GGP acquisition in August 2018, as BPY acquired the remaining stake in the class A U.S. mall portfolio.
The opportunistic portfolio generated FFO, realizing gains of US$146 million, up 52% year over year. This included US$60 million of realized gains from the sales of mature assets.
At writing, Brookfield Property offers a yield of 7.1%. Combined with the 5-8% per year cash distribution growth that management aims for, the stock can deliver total returns of about 12-15% per year. The discounted shares will likely boost those returns. What an incredible opportunity BPY stock is!
Notably, BPY’s cash distribution is a bit complicated. For example, its Q1 cash distribution consisted of U.S. interest, REIT dividend, and return of capital that are subject to U.S. withholding taxes — unless you hold the stock in your RRSP.
This makes BPY a perfect stock for income and total returns investors alike to buy and hold in their RRSPs/RRIFs. Quality real estate assets makes a great addition to any diversified income portfolio for their stable cash flow generation abilities.