A Closer Look Into The Brookfield Realm Following BPY Q1 Earnings
On May 1, Canaccord Genuity (CG) released a research note titled "Core Operations Healthy, Aggressive Pace Of Growth," updating $16.5 billion Brookfield Property Partners LP (NYSE: BPY) after Q1 2015 earnings.
Brookfield Property Partners, a Toronto-based REIT, owns over 22,000 multifamily apartment units in the U.S and Canada and trades with a $5.9 billion float on the NYSE, with units currently yielding approximately 4.6 percent.
However, it is difficult to put Brookfield Property Partners' recent performance into perspective without understanding how it fits into the overall Brookfield real estate realm.
Tale Of The Tape – Past Year
The Vanguard REIT Index Fund (NYSE: VNQ) is a good proxy for the broader U.S. equity REIT sector.
Despite trading lower, after a massive preferred equity issuance to Qatar Investment Authority (QIA), Canadian REIT Brookfield Property Partners has still outperformed the U.S. REIT index by a wide margin TTM.
The QIA investment was in conjunction with the joint purchase and redevelopment plans for the huge Canary Wharf project outside of London, including over 3,000 residential units, additional office space, shopping and a school site on a vacant 30 acre land parcel.
During the past 52 weeks, Brookfield Property Partners has traded in a range of $18.39 to $26.25 per share.
Brookfield Real Estate – The Big Picture
Global alternative asset manager, Brookfield Asset Management Inc. (USA) (NYSE: BAM) with over $200 billion of AUM, owns approximately 68 percent of Brookfield units. On April 22, it was Brookfield Asset Management in the news purchasing U.S. apartment REIT Associated Estates Realty Corporation (NYSE: AEC) for $28.70 cash per share, or approximately $2.5 billion including assumed debt.
Brookfield Office Properties owns and operates 255 properties, containing 118 million square feet of space around the globe. Brookfield's retail holdings include: a 33 percent undivided interest in U.S. No. 2 Class-A mall REIT General Growth Properties Inc (NYSE: GGP) a 34 percent interest in Class-B mall redevelopment specialist Rouse Properties Inc (NYSE: RSE) and significant mall interests in Brazil.
Brookfield Asset Management also owns approximately 65 percent interest in U.S. multifamily giant Fairfield Residential, manager of over 50,000 units and owner of more than 27,000 units through its non-traded REITs. Additionally, Brookfield Asset Management owns significant hotel properties, over 59 million SF of industrial/logistics space worldwide and recently purchased 300 net-leased automobile dealerships in the U.S. at the close of 2014.
Brookfield Asset Management holds a 22 percent interest in the Canary Wharf project.
CG – Brookfield Property Partners: Buy, $28 PT
The CG $28 price target represents a potential upside of approximately 22.3 percent based upon a May 1 closing price of $22.90 per share, plus a 4.6 percent dividend yield.
Canaccord has lowered its estimates based upon Brookfield Property Partners' Q1 2015 performance and guidance from management.
The CG target price of $28 is still below its Brookfield NAV (net asset value) estimate of $28.79 per LP unit.
CG – Brookfield Property Partners: Rationale
- Brookfield Property Partners reported FFO per diluted unit of $0.25 down from $0.28 Y/Y and below the CG estimate of $0.28.
- CG noted that the 10 percent reduction Y/Y in FFO per unit was attributed to the issuance of $1.8 billion of preferred equity to the Qatar sovereign wealth fund and $9 million reduction in FFO from FX, the strong USD versus other currencies.
- CG also noted that the Canary Wharf investment will not be accretive until later years after development is completed; however, Brookfield Property Partners' Brookfield Place in lower Manhattan should begin to contribute to FFO as it is occupied in FY 2016.
- CG felt that the announcement of COO and CFO management changes at Brookfield would be viewed positively by the market, as they are experienced Brookfield REIT executives.
- The CG NAV per LP unit of $28.79 represents an approximated 19.5 percent discount from current pricing.
CG – Brookfield Bottom Line
Canaccord continues to believe that "BPY is well positioned to drive cash flow and NAV per unit higher over the next several years, through
- 1) The lease-up of vacant space
2) Marking leases to market
3) Completing development and redevelopment projects
4) Completing a substantial volume of large opportunistic acquisitions"
During the past five trading days, Brookfield Property Partner shares have lost approximately 5 percent of their value. Mr. Market appears to be discounting the upside from future developments as well as Q1 earnings and management guidance.
However, the broader REIT sector as measured by VNQ ETF shares has also traded down 3.2 percent during the same period.
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