Brookfield Property Partners (NYSE:BPY) is a spin-off of Brookfield Asset Management (NYSE:BAM). The whole reason for the spin-off was to unlock value and create enough transparency for investors to comfortably invest in the real estate segment of BAM. However, the company still remains undervalued. First, I'll give an overview of the company and detail how investors will be able to profit from this market mis-pricing.
It has premier assets around the world including New York, London, and Los Angeles. These are core cities were real estate continues to grow and can maintain its value even through a recession. As a result, it's not surprising that occupancy has been consistently above 90%.
BPY's assets are mainly core office and retail properties where it targets 10-12% returns, and has successfully executed on this strategy. A sampling of its premier assets includes Canary Wharf, London, and also Brookfield Place in New York. Over the past two years, the company has executed on this strategy, and its revenue has grown accordingly. Furthermore, BPY has an opportunistic and development strategy where it targets 20% returns. These are more risky, but also a smaller portion of its portfolio (15%). Another key development in this area is the ability of the company to actually invest in the private equity fund of BAM. This is where the company plans on executing its opportunistic strategy in the future instead of doing it in-house.
Let's talk about the company's FFO. According to investor presentations, it plans to increase FFO by 8-11% per year. This may seem lofty, but it's doable because there are several leases that are currently below market. If the real estate market still remains strong in these core cities, then that'll serve as a catalyst to a higher stock price. According to the slide deck in the investor relations page, it plans to have an accounting value of $46/unit. Of course, this doesn't carry that much weight because it's an internal management, but it's assuring to know that the company has a target in sight.
Finally, the most important part - valuation. The company is currently trading at a 30% discount to NAV according to its investor presentation. It's worth $30/unit on an IFRS basis. The company unlocked some of the value by selling some assets while the real estate market was hot. However, I see the catalyst coming from its earnings and FFO increasing from the new leases. This will get on the radar of investors. Remember, you're getting a company that is trading below what it would cost to sell all of its buildings. It's not like a bank where it's too big to be sold. If BAM sees a good offer for its assets, then I doubt that it'll have any hesitation on selling it.
Compared to equally as well managed REITS like Sam Zell's Equity Residential (NYSE:EQR), this valuation is insane. EQR is currently trading at a PE of 30, which translates into an overall cap rate of 3.3%, which is quite low for a REIT that invests in office properties. I believe that BPY is as equally well managed and has hit its performance targets to at least warrant a book value valuation if not more.
I'm looking for a 30% return in the next one and a half years. The management has said that stock buybacks will also be employed to reach the NAV.
Disclosure: I am/we are long BPY.
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.