This is a guest contribution written by Kay Ng who writes on Motley Fool Canada and also writes on Seeking Alpha under the alias Canadian Dividend Growth Investor. She also maintains a blog at Passive Income Earner with a focus on dividend investing as a Canadian investor in Canada and the U.S.
The recent dip in Brookfield Property Partners LP (TSX:BPY.UN)(NYSE:BPY) has made it more attractive to buy again. The commercial real estate company yields about 4.8% and is currently undervalued by about 21%.
Brookfield Property was spun off from Brookfield Asset Management Inc (TSX:BAM.A)(NYSE:BAM) in 2013. Brookfield Asset Management is the general partner of Brookfield Property, owns 62% of it, and continues to manage it.
With management’s big ownership in Brookfield Property, management’s interests are definitely aligned with that of unitholders’. In fact, one of the biggest reasons to own Brookfield Property is for its growing distributions supported by stable cash flows. Brookfield Property is one example of a consistently high paying dividend stock.
Brookfield Property owns, operates, and invests in global commercial real estates. It has a core portfolio of office and retail assets, which makes up about 83% of its balance sheet. Brookfield Property earns stable cash flows and aims to generate total returns of 10-12% from its core portfolio.
Source: Brookfield Property’s assets – Slide 23 (BPY August 2016 Presentation)
It also has an opportunistic portfolio of multifamily, industrial, hospitality, triple net lease, self-storage, and student housing assets, which makes up about 17% of its balance sheet.
Brookfield Property expects this portfolio to provide significant upside as they’re either mispriced assets or assets which have value-adding opportunities. The company aims to generate total returns of 18-20% from this portfolio.
Brookfield Property, along with Brookfield Asset Management’s share, has about US$146 billion of assets under management across North America, Brazil, the U.K., Europe, Australia, China, and India.
Brookfield Property’s core office portfolio is comprised of about 150 premier office properties in gateway cities such as New York, London, Toronto, Los Angeles, Sydney, and Berlin.
This portfolio’s occupancy rate is 92% with an average lease term of more than 8 years. Because Brookfield Property invests globally, it can leverage its relationships across geographies. For example, 10 of Brookfield Property’s top 10 tenants rent from them in 3 or more cities.
Brookfield Property’s core retail portfolio is comprised of about 128 first-class retail properties throughout the U.S. This portfolio’s occupancy rate is 95.1%.
Brookfield Property owns 25% of the top 400 malls in the U.S. These malls tend to outperform, and the changing retail landscape has created opportunities for the company to improve the productivity in these malls through redevelopments and inserting new technology to improve the retail and dining experience.
Brookfield Property’s opportunistic portfolio is just as impressive. This portfolio consists of 108 office properties across the U.S., the U.K., Brazil, and India, 43 retail properties in the U.S., and in select Brazilian markets, 204 industrial properties in North America, and Europe, about 35,000 multifamily units throughout the U.S., 28 hospitality properties with more than 18,400 rooms in North America, Europe, and Australia, more than 300 properties leased to car dealerships in North America under triple net lease arrangements, more than 150 self-storage properties across the U.S., and 13 student housing properties with about 5,700 beds in the U.K.
Is It Priced at Fair Value (or Better)?
Stocks that regularly hike their distributions make it easy to determine if they’re relatively expensive or cheap at current prices. Bargain dividend stocks make excellent investments because investors get ‘paid to wait’; dividends provide a return while investors wait for the stock to rise to fair value.
In the past two years or so, taking out the extreme cases, Brookfield Property traded between a yield range of roughly 4.5-5.2%. So, at today’s yield of 4.8%, it’s not a bad place to invest in some units.
On June 30, Brookfield Property’s IFRS value per unit was US$29.75. So, Brookfield Property trades at a discount of about 21% based on its IFRS value.
Given the chance, it’d be a great opportunity to buy Brookfield Property at a yield of 5% or higher.
Conclusion: What Kind of Returns Can You Expect?
Brookfield Property offers a growing income and steady price appreciation. Obviously, the lower the price you buy the units at, the higher your returns will be. That goes for all investments given all else being equal.
Management targets to grow its funds from operations (FFO) by 8-11% per year, which would support the distribution growth guidance of 5-8% per year with enough leftover FFO to reinvest into the business. Management also targets after-tax returns of 12-15% on its invested capital.
Based on its currently distribution yield of 4.8% and its growth of 5-8%, Brookfield Property’s total returns can be 9.8-12.8%. However, investors should expect higher returns than that because the units are undervalued today.
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