Brookfield Property Partners: Still Undervalued After Spin-Off

Apr.16.14 | About: Brookfield Property (BPY)

Summary

The current market environment has created situations where a company's value and price diverge.

Brookfield Property Partners has strong fundamentals and is returning cash to shareholders.

The stock is worth upwards of $24 per share and should get there as Wall Street notices BPY's successes.

In today's volatile economic and financial landscape, fundamental principles of investing can become lost in the fast paced, news-driven environment that dominates most investor's and trader's attention. Seasons of volatility such as these can cause many healthy, growing companies to trade at prices that vary drastically from their actual value. Investors can take advantage of this temporary disconnect to own high-quality businesses for a fraction of their intrinsic worth. One of these opportunities can be seen in the case of Brookfield Property Partners (BPY). As part of a strategic transformation, Brookfield Asset Management (BAM) has spun off many parts of its real estate and property assets into separate entities. BPY was spun off in early 2013, and has since attracted very little attention from Wall Street pundits and analysts. As the company becomes more prevalent in the market, investors can buy into a very well managed and successful company before Wall Street gives the stock the value its fundamentals warrant.

Overview

Brookfield Property Partners is an international commercial property owner with assets primarily located in the United States, Europe, Brazil, and Australia. The company uses market timing to invest in properties that provide favorable risk/reward over a long term contract view with its tenants. Properties in its $36 billion portfolio vary greatly by both industry and geography, as shown below:

Assets Region % of Total
Breakdown by Geographic Region
$28.7B North America 79.7%
$2.9B Europe 8.06%
$3.2B Australia 8.89%
$1.0B Emerging Markets 2.78%
Click to enlarge
Assets Segment % of Total
Breakdown by Business Segment
$17.2B Office 48%
$15.2B Retail 42%
$.9B Industrial 2.5%
$.8B Multi-Family 2.2%
$1.7B Hospitality/Other 4.7%
Click to enlarge

This diversity of investment shields BPY from cyclical and secular shifts in local economic activity, which provides stability with regards to revenue and income. The company's average property lease term is around 6.5 years, with more than 50% of its contracts expiring beyond 2019. This clarity adds even more certainty to the financial safety of BPY's earnings.

Brookfield's largest market is the Los Angeles area, with properties including the Bank of America Plaza and the Wells Fargo tower in the heart of downtown. Tenants in this area include both Bank of America (BAC), Wells Fargo (WFC), and Deloitte. Specifically, Bank of America serves as a tenant for 6.6% of all of Brookfield's properties. These customers and high profile locations give BPY additional security due to the size and stature of investments it has made. Going forward, the company plans to increase occupancy rates while using its strong financial position to make strategic investments in properties that will boost the bottom line.

BPY's strong balance sheet gives it flexibility when returning cash to shareholders. The company currently sports a 5% yield at today's prices, and management has pledged to grow this dividend by 3-5% annually. The $1.00 per year payout comprises 71% of BPY's earnings, which would seem like a lofty distribution in a normal situation. However, Brookfield's management has recently outlined plans to pay out 80% of its earnings as dividends. Based on 2013 Funds from Operations (FFO) of $1.41, the expected payout of the stock should reach $1.128 in the near future. With this distribution, BPY would have a new yield of almost 6%, which safely adds a significant amount to its stock's capital appreciation. This yield, combined with reasonable organic growth as management invests in new properties, should give shareholders plenty of reasons to stay in the name for the medium to long term.

BPY's management team is led by CEO Ric Clark, who has been with Brookfield Asset Management since 1984. Clark took over at the helm of the properties division in 2002, and has had much success in his leadership role since then. Under his management, Brookfield oversaw two acquisitions that added 35 million square feet to the company's property portfolio. This oversight experience gives Clark unique knowledge of the inner workings of the company, as well as expertise in the real estate analysis and investment process. Clark's time as CEO has seen the division's gross market value double from $8 billion to $16 billion. This impressive track record has brought BPY much success, and is sure to continue as Clark shapes strategy and operations going forward.

Valuation

Brookfield's viability as an investment becomes even clearer when the current valuation of the stock is taken into account. When looking at BPY's 2013 annual report, the company disclosed year-end FFO at $1.41 per share. This means investors are currently paying 13.5 times what the company made last year. The disconnect comes from information disclosed later on in the report, where management clearly stated that they expect 20% organic growth per year going forward. If this growth materializes as management expects, then BPY deserves to trade at least 20 times FFO, which would match the growth rate being projected.

What's more, the company also reported that they see shares currently trading at a 20% discount to the company's net asset value, or NAV. These metrics place a target price for the stock at around $23 - $28 per share. If management sees this disconnect between the real value of the business and the business's current value, then investors should as well.

Catalysts

Going forward, Brookfield has a major demographic shift swinging in its favor. After the financial crisis of 2008 and the subsequent housing crash, families started showing more preference for renting rather than owning a home outright. BPY is perfectly positioned to capitalize on this shift, with over $5.9 billion invested in their residential segment over the past few years. This investment should be rewarded nicely as occupancy rates increase and rental fees bring more cash to the top and bottom line.

Brookfield also plans to shift more cash to shareholders in the near term. The company is planning to sell $4 billion in office property assets in order to free up funds for continuing operations. This includes dividend increases and buybacks once it has management's approval. Investors can feel confident in management's continuing strategy to reward shareholders over the long term.

Conclusion

Brookfield Property Partners is a solid international real estate company that is returning cash to shareholders and taking advantage of major demographic shifts to increase value. However, due to the recent spinoff of its assets, as well as volatile symptoms of a fast-paced market, the company hasn't garnered the attention, and price, that it deserves. Investors should buy into this growing story to benefit from the coming weeks and months as Wall Street takes notice of BPY's impressive fundamentals and bids the stock up to a price it deserves.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BPY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.