Brookfield Property Partners (NYSE:BPY) is a leading global commercial property company with operations that include premier office, retail, multi-family, industrial and hotel assets. The company was spun off from Brookfield Asset Management (NYSE:BAM) and began trading independently in April, 2013. Our investment thesis is centered on the long-term performance under BAM and that it will continue in BPY with the same management team and value-based strategy. Since 1989, Brookfield has invested about $23 billion of equity in commercial property generating an estimated annual internal rate of return of approximately 16%.
Brookfield Property Partners reported results [Source] for the second quarter 2014 with fully diluted Funds from Operations (FFO) of $217 million or $0.32/unit compared to $129 million or $0.28/unit in 2Q13. The significant increase in FFO was due primarily to the increased investments in General Growth Properties (NYSE:GGP) and Brookfield Office Properties (NYSE:BPO). The per unit results increased to a smaller extent as equity units were issued primarily for the BPO acquisition.
[Source] BPY 2Q14 Earnings Release
Net income for 2Q14 attributable to unit holders was $892 million ($1.31 per unit) versus $277 million ($0.59 per unit) for the 2Q13. The increase in income was also due primarily to the increased investments in GGP and BPO and fair value gains in BPY's retail and office operations resulting from greater leasing activity and stronger global property markets.
With the completion of the BPO merger, we believe we have firmly established BPY as the leading global owner and operator of high-quality real estate," said Ric Clark, chief executive officer of Brookfield Property Group. "With the scale and scope of our portfolio, we have many levers at our disposal to drive future growth. In addition to utilizing our global operating platforms to enhance the cash flow of our properties and to originate new opportunistic investments, we have a substantial pipeline of significantly pre-leased office, retail, multi-family and industrial development projects underway in high-value markets."
Diversity of Total Invested Capital (pre-corporate segment):
[Source] Brookfield Property Partners L.P. Corporate Profile
Management's Operating Results Summary:
Office operations generated fully diluted FFO of $170 million for the 2Q14 compared to $89 million in the 2Q13. The $81 million increase in fully diluted FFO was mainly due to the acquisition of BPO and a $43 million gain realized on a debt investment, partially offset by $10 million of transaction costs associated with the BPO acquisition.
Office operations contributed $715 million of fair value gains on a proportionate basis, primarily driven by increased occupancy and stronger valuations for office assets in major gateway markets, including New York City, Houston and Los Angeles.
In 2Q14, BPY leased 2.7 million square feet of space at average net rents, approximately 5% higher than expiring rents including:
- 1.1 million square feet at Brookfield Place New York to Time Inc. (700,000 sq. ft.) and BNY Mellon (350,000 sq. ft.). An additional lease of 117,000 square feet to Jane Street was completed at this property subsequent to quarter-end. Occupancy at Brookfield Place has increased from 59% upon expiry of the Bank of America/Merrill Lynch lease on September 30, 2013 to 88% at present.
- 125,000-square-foot lease with Memorial Resource Development at One Allen Center, Houston.
- 112,000-square-foot lease with Deloitte at Gas Company Tower, Los Angeles.
A $43 million gain on a $320 million debt investment in the Spanish office company Immobiliaria Colonial (Colonial). BPY and institutional partners acquired $1 billion of debt at an average 12% discount to face value. The strategy for the late 2013 investment was to lead a recapitalization where BPY converted debt into an equity stake in the company. However, a competing consortium successfully acquired Colonial, repaying BPY debt at par plus accrued interest and triggering the gain.
With institutional partners, BPY executed definitive agreements to invest approximately $346 million of equity, $109 million net to BPY, to acquire a portfolio of six office parks in India, majority owned by Unitech Corporate Parks (Unitech), an AIM-listed entity. These office parks primarily located in the National Capital Region (NCR) and Kolkata markets total 16.8 million square feet. The office parks that are in operation or under construction, which total 13.8 million square feet, are approximately 73% leased predominantly to high-quality international tenants. Shareholders of UCP, an AIM-listed company that owns 60% of Unitech, recently approved the transaction, and closing is anticipated in September or October.
Other significant Office transactions in 2Q14 included:
- Completed the merger of BPY and BPO.
- Acquired an additional 50% interest in KPMG Tower, Sydney, for A$130.6 million. BPY now owns 100% of the property, which is 99% occupied by KPMG.
- Sold a 50% interest in Republic Plaza in Denver to an institutional investor in a transaction valuing the property at $480 million. Net proceeds to BPY were approximately $98 million. BPY will retain management and leasing responsibilities for the property.
- Sold Fujitsu Centre in Sydney for $89 million and Chorus House in New Zealand for $32 million.
- Executed a $900 million property level financing on the Grace Building in New York City with a seven-year term at a fixed rate of 3.6%. Net new proceeds of $555 million ($233 million at BPY's share) were realized at closing.
Retail operations reported fully diluted FFO of $112 million for 2Q14 versus $67 million for 2Q13, primarily due to increased ownership stake in GGP as well as 5.2% same-store net operating income (NOI) growth, partially offset by BPY's $5 million share of a legal settlement at GGP. During the quarter, retail operations contributed $175 million of fair value gains, mainly due to appreciation of investment in GGP warrants and strong market conditions.
Occupancy in the retail portfolio grew to 95.2% in the 2Q14, 50 basis points higher than the 2Q13. GGP posted a strong performance during the quarter, realizing suite-to-suite spreads of 14.4% on new leases. GGP has executed nearly all of its targeted 2014 leasing within the first two quarters.
GGP continues to advance the largest of its redevelopment projects, the expansion of its Ala Moana Center in Honolulu. Currently, approximately 75% of the 650,000 square feet of expansion space is leased, which is ahead of internal expectations. The $573-million first phase of the redevelopment is scheduled to be complete in late 2015. In addition, GGP continued to expand its presence in urban street retail, committing during the second quarter to three such acquisitions in New York City with a combined equity investment of approximately $450 million, of which BPY's share is approximately $130 million.
Other significant Retail transactions in the 2Q14 included:
- Rouse acquired Bel Air Mall in Mobile, AL for $135 million.
- GGP sold Fallbrook Center for $210 million. Net proceeds to GGP after repayment of existing debt and closing costs were approximately $104 million.
Industrial, Multifamily and Hospitality Operations:
Industrial operations posted fully diluted FFO of $3 million for the 2Q14 compared with negative $1 million for the 2Q13. The increase was primarily due to the acquisition of Gazeley Limited and IDI Realty, LLC in the second and fourth quarters of 2013, respectively, partially offset by one-time severance costs associated with the restructuring of the industrial platform.
In the first half of 2014 occupancy increased to 88.4% with the execution of 5.4 million square feet of leasing within the industrial portfolio.
The multi-family and hotel operations posted fully diluted FFO of $18 million for the 2Q14 compared with $14 million for the 2Q13, primarily due to acquisition of multi-family assets during the period partially offset by expenses associated with the refinancing of the Atlantis debt.
Occupancy in the multi-family units at the end of the quarter was 93.5%, while in-place rents trended upward by approximately 2% quarter-over-quarter. Renovation of newly acquired assets continue; with a budget of refurbishing 2,000 units in 2014.
In July, definitive agreements were executed to invest approximately $320 million ($100 million at BPY's share) to acquire a 3,962-unit multi-family portfolio located in Manhattan with institutional investors. This transaction is expected to close in September.
Other significant Industrial, Multifamily and Hospitality transactions in the 2Q14 included:
- Sold six industrial assets for $86 million in gross sales, realizing net proceeds of $7 million.
- Refinanced the Atlantis Hotel in the Bahamas with a $1.75 billion loan from a consortium of lenders. The loan has a seven-year term, and $1.4 billion of the debt is fixed-rate with an average coupon of 7.0%.
- An Australian hotel portfolio closed a new $553 million credit facility with a syndicate of five banks.
Normal Course Issuer Bid:
Commenced Normal Course Issuer Bid on the Toronto Stock Exchange for the one-year period commencing June 18, 2014 and ending June 17, 2015, allowing BPY to purchase, at its discretion, up to 11,549,010 limited partnership units, or approximately 5% of its issued and outstanding limited partnership units.
The Board of Directors has declared a quarterly distribution of US $0.25 per unit payable on September 30, 2014 to unit holders of record at the close of business on August 29, 2014. Unit holders resident in the United States will receive payment in U.S. dollars and unit holders resident in Canada will receive their distributions in Canadian dollars at the exchange rate on the record date, unless they elect otherwise.
Management seems confident they can deliver total returns approaching 20% per year over the next five years. In their May 2014 Brookfield Property Partners L.P. Corporate Profile slide 3 starts by describing BPY's value proposition: "With its 5% current yield, BPY offers investors the opportunity to earn up to a ~20% annual return over the next five years" and then presents the following way to get there:
Source: Brookfield Property Partners
It appears Mr. Market continues to provide an attractive opportunity. BPY is selling at about a 20% discount to current net asset value of $25.69/unit and we can collect a 4.8%/year dividend while BPY works to deliver additional value.
Disclosures: Long BPY, BAM, BIP, BEP.