Think for a moment of all the essential infrastructure the global economy requires to function: roadways and railways, ports and pipelines, electrical transmission and distribution systems, telecommunications infrastructure…

Without these essential assets, the economies globally would essentially shut down.

Brookfield Infrastructure Partners (TSX:BIP.UN)(NYSE:BIP), or simply BIP, owns and operates a global portfolio of premier, long-life assets with attractive attributes, as they are or will

• Diversified by both geography and industry;
• Typically regulated or contracted on a long-term basis;
• Require relatively minimal maintenance capital expenditures;
• Generate stable cash flows; and
• Continue to appreciate in value over time by virtue of high barriers to entry and steady, predictable returns.

User demand for infrastructure assets tends to be relatively inelastic because of the essential nature of many of the services. As a result, they exhibit a lower correlation to economic cycles compared to other sectors. Some assets, such as electricity and gas distribution networks are usually regulated, which usually results in an increase in the predictability of return.

BIP invests in a diversified portfolio of infrastructure or “real assets,” including ports, railroads, utilities, toll roads, pipelines, data centres, and telecom towers. Not only are they essential assets, but they also offer high barriers to entry and long-term, stable cash flows that are regulated or underpinned by take-or-pay contracts.

BIP’s strategy is to acquire high-quality businesses on a value basis, actively manage operations, and opportunistically sell assets to reinvest capital into the business. BIP units began trading on the New York Stock Exchange in 2008 and on the Toronto Stock Exchange in 2009. The company has established a solid performance record, delivering compound annual total returns of 15% since it first went public.

Brookfield Asset Management (BAM) is a strong partner to BIP. Not only does it provide management guidance and assistance, but together, they excel at scouring the globe to uncover and acquire high-quality companies at attractive and, at times, distressed prices.

Institutional partners are a key to doing deals, particularly in weaker equity markets. The BAM-led private infrastructure funds nearly always invest alongside BIP, so BIP is less dependent on the state of the capital markets because of its relationship with BAM.

Having access to private capital allows BIP to participate in acquisitions, even in weak equity markets, and take on larger deals, while BAM’s broader funds outside infrastructure means that BIP can enter complex transactions that other strategic investors may not be able to execute; for example, to put infrastructure assets into BIP and non-infrastructure assets into a BAM-led private equity fund. BIP’s primary objective is to invest globally at the best risk-adjusted returns, meaning it is typically agnostic about its geographic mix of assets.

Investment thesis

User demand for infrastructure assets tends to be relatively inelastic because of the essential nature of many of the services. As a result, they exhibit a lower correlation to economic cycles compared to other sectors. Assets such as electricity and gas distribution networks  are usually regulated, which results in increased predictability of returns.

BIP units represent a good combination of yield plus growth. The company’s objective is to generate long-term return on equity of 12-15%. With an above-average distribution yield of 3.47% and annual distribution growth that should continue to be at the high end of management’s 5-9% guidance range, the units should outperform the broader market.

The company’s broadly diversified source of funds from operations (FFO), solid balance sheet, and healthy organic growth outlook continue to make BIP an outstanding candidate as a core infrastructure position in any diversified portfolio.

Growing organically and through acquisitions

BIP’s current pipeline of advanced transactions totals approximately $1.7 billion. It has signed binding agreements for three recently announced transactions representing $1.3 billion that expand its energy and data infrastructure operating groups. The three large-scale North American transactions include a U.S. data centre business from AT&T , a Western Canadian midstream business from Enbridge, and a North American residential energy infrastructure business from Enercare.

These new investments will be funded from the $4 billion of liquidity on its balance sheet. BIP’s strong backlog of capital projects across its operating groups — with another $400 million of initiatives under exclusivity and in the final stages of due diligence — will allow BIP to continue to grow cash flow.

Solid second-quarter 2018 results

BIP generated FFO of $294 million, or $0.75 per unit, in the second quarter of this year versus $295 million or $0.80 per unit in Q2 2017. While second-quarter FFO benefited from another period of good organic growth, it was impacted by the loss of income associated with the sale of the Transelec assets and the time required to redeploy the significant proceeds into new investments.

Also affecting second-quarter results was a stronger U.S. dollar, which reduced FFO by about $26 million. On a constant-currency basis, organic growth was 8%. On an adjusted basis, BIP earned $0.21 a share in the second quarter, beating analysts’ expectations for $0.12 a share.

Almost half of BIP’s EBITDA is from low-risk, regulated operations, while another 45% is governed by long-term contracts, providing stability and predictability. These attributes contribute to minimizing competition and enhancing the stability of returns.

I expect BIP to generate continued cash flow growth from the combination of accretive acquisitions; regulatory frameworks and contractual structures that provide for annual inflationary growth; assets with fee-based revenues that are sensitive to GDP; capital deployment into existing businesses; and larger capital projects levering off the existing businesses.

The balance sheet is in good shape; BIP ended the quarter with total liquidity of $4 billion — more than sufficient for the company to fully fund all its committed transactions and organic growth backlog.

While BIP carries excess liquidity, the company is progressing its next phase of capital recycling, with a target of approximately $1 billion of proceeds over the next six to 12 months to capitalize mature investments and fund further accretive growth initiatives.

The post If I Could Only Buy 1 Stock, it’d Be Brookfield Infrastructure Partners L.P. (TSX:BIP.UN) appeared first on The Motley Fool Canada.

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Commercial real estate is an integral part of a truly diversified portfolio. But not all real estate is created equal. Grocery-anchored properties are necessity-based, supplying products that are essential to daily life, such as food. Necessity-based retail provides a conservative income component to your portfolio and is a pure play on inflation in the form of rising food prices.

Loblaw Companies Ltd. spun out Choice Properties Real Est Invstmnt Trst (TSX:CHP.UN) in 2013 in its strategy to maximize the value of the real estate holdings of its food retail operations. Bolstered by quality real estate, a strong anchor tenant in Loblaw, and strong management, Choice Properties’s occupancy level remains steady at 99%, with a weighted average remaining lease term of 10 years.

On May 4 of this year, Choice Properties, which counts Loblaw as its principal tenant and largest unitholder, closed a $3.93 billion deal to acquire Canadian REIT, or CREIT, in a strategic move to expand and diversify beyond its retail property holdings by adding more industrial, office, and residential space to its retail portfolio. The deal catapulted Choice to the position of Canada’s largest REIT.

The combined entity holds 757 properties totalling 67 million square feet of gross leasable area. Combining Choice’s retail properties with CREIT’s retail, office, industrial, and residential portfolio provides the benefits of better diversification. CREIT’s former heavy property portfolio exposure to Alberta of 38% of net operating income (NOI) drops to 21%, while Choice’s exposure to Loblaw properties—88% before the deal—drops to 58%. Greater diversification yields better stability.

Almost 90% of Choice’s development sites are located in Canada’s six largest cities. This includes 1.5 million square feet of retail development, 1.2 million square feet of industrial development, close to one million square feet of residential development, plus a number of major mixed-use projects.

Internal property development generates higher returns than acquisitions, making it a prudent way to drive growth in net asset value (NAV). Choice Properties’s development sites provide years of growth potential. This provides the means for CREIT’s well-respected management team, who is now heading up Choice Properties REIT, to accelerate its non-retail business, while collecting rents from stable tenants such as Loblaws and Shoppers Drug Mart.

Solid Q2

On July 18, Choice announced second-quarter 2018 results that were ahead of analysts’ expectations. The second quarter, the first reporting period since Choice acquired CREIT, showed steady progress in the integration of the two REITs.

Funds from operations for the second quarter were $156.6 million, or $0.27 per diluted unit, up 4.4% from $108.4 million, or $0.26 per diluted unit, in the second quarter of 2017. Adjusted cash flow from operations (ACFO) was $152.7 million, up 5.7% from $97.5 million for Q2 2017. The ACFO payout ratio was 70.6% in the most recent quarter versus 77% a year ago.

Overall, same-store NOI grew 2%, while property developments lifted same-property NOI growth to 3.4%. With the addition of CREIT’s properties portfolio, Choice is in the early stage of a very large, long-term, and accretive intensification development opportunity that will provide further opportunity for value creation well out into the future.

The program encompasses more than 3.7 million square feet of active development projects on over 60 properties in core urban markets, mostly in major hubs.

Choice units are undervalued. They trade at a 4.6% discount to NAV. The company’s trailing and forward P/E ratios are both at or near their five-year lows. Based on price to sales, Choice trades at a 16% discount to its residential and commercial REIT industry group peer average.

Choice’s trailing P/E of 2.70 represents a 55% discount to its industry group average, and the units are also less expensive than peers on a price-to-cash-flow basis. Choice pays a safe monthly distribution of $0.061667 per share ($0.74 annually), which, at today’s closing price, represents a 6% yield.

The post Growth and Safety in a Single Stock appeared first on The Motley Fool Canada.

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I look for thematic investment opportunities supported by positive secular trends. A secular trend is distinctly different from the cyclical trends that can influence financial markets in a much more transitory fashion. Secular trends are long term in nature. They can run for years or even decades, triggering fundamental shifts that are important for investors to identify.

Unlike cyclical trends, they can operate independently of the financial markets and can be highly disruptive, dramatically changing the landscape of a particular industry. These characteristics can make them powerful tailwinds for companies that are positioned to benefit from them, particularly because they are typically less affected by shorter-term market or economic gyrations.

Continued global population growth and, in emerging markets, a growing middle class with changing diets, are spurring the demand for increased food production. According to the United Nations Population Division, the current world population of 7.6 billion is expected to reach 8.5 billion by 2030, 9.7 billion by 2050, and 11.2 billion by 2100. To solve the current food crisis and meet the needs of the growing global population with its changing diets, food production will have to double within the next 30 years.

This increased food production will have to occur on less available arable land. The world has already lost a third of its arable land due to erosion or pollution in the past 40 years. This high-quality, food-producing land has been lost at a rate that far outstrips the pace of natural processes to replace diminished soil.

Doubling food production as the amount of arable land decreases can only be accomplished by intensifying production. The world will not be able to meet its food production goals without fertilizer. Today, commercial fertilizer is responsible for delivering 60% of the world’s food production.

Nutrien Ltd.’s (TSX:NTR)(NYSE:NTR) competitive advantages are anchored by its unique business model, combining primary fertilizer production and manufacturing with the world’s largest direct-to-grower retail distribution network. This unique business combination enables the company to achieve higher plant operating rates, leverage its size and scale with suppliers, achieve significant logistics and distribution synergies, and gather detailed market intelligence globally from all levels of the crop input chain.

And because Nutrien is the largest agricultural retailer in the world, its retail segment has significant purchasing power. This is a unique competitive advantage for Nutrien. None of its fertilizer competitors has a retail business.

Formed through the merger of Agrium and Potash Corp. in January 2018, Nutrien is the world’s largest and most diverse crop-input company. The company produces and distributes over 26 million tonnes of potash, nitrogen, and phosphate products to customers around the world.

Nutrien is targeting $500 million in synergies from the merger of Agrium and Potash Corp. It expects to realize the full amount of these synergies on a run-rate basis by the end of 2019. I believe these synergies are achievable and should help drive earnings and cash flow growth. Analysts estimate $200 million of synergies in 2018 alone.

Combined with its agriculture retail network, which it has rebranded Nutrien Ag Solutions following the merger, and which services over 500,000 growers, Nutrien offers investors exposure to the growing global demand for agricultural products and services.

Nutrien is well positioned to meet the needs of a growing world and create value for its stakeholders, offering an attractive earnings profile, growing free cash flows, and a solid balance sheet. The company is benefitting from better fertilizer prices from favourable market conditions. It is an attractive investment supported by strong cash generation and execution, with a favourable total return profile.

The term “transformational” is used too often in company press releases describing mergers or acquisitions, but I believe it is appropriate to describe this transaction. The “merger of equals” between Agrium and Potash Corp. represents a bold strategic action by both companies to create a stronger business to address the current market challenges and capitalize on future strategic opportunities.

More importantly, in the long run, I believe there are significant potential strategic benefits. As Nutrien president and CEO Chuck Magro said, “Combining our complementary assets will enable us to serve our customers more efficiently, deliver significant operating synergies and improve our cash flows to provide capital returns and invest in growth.”

So far, this is exactly what Nutrien has been doing.

The post Nutrien Ltd. (TSX:NTR): If I Could Only Buy 1 Stock… appeared first on The Motley Fool Canada.

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