Brookfield Property: Q4 Update Demonstrates Management's Conviction In Unit Value

| About: Brookfield Property (BPY)

Summary

BPY performed well in Q4, with FFO increasing 12% and quarterly distributions up 5%.

Management bought back 1.7 million units in Q4 as it believes the company is undervalued.

Capital redeployment and buybacks should be catalysts to unlock value.

Brookfield Property Partners (NYSE:BPY) demonstrated management's strong operating excellence and commitment to smart capital allocation decisions when it reported Q4 results in early February. Revenue increased 11.7% y/y to $1.3 billion, and available funds from operations per unit increased 11.7% to $0.38. As a result, Brookfield will increase its quarterly distribution to 5% to $0.295 per unit, equal to an annual yield of $1.18. Management provided several key updates on property movements in Q4 as well as insight into capital allocation heading into 2017. With units trading at a discount to NAV, I believe units continue to represent an attractive investment opportunity.

Buybacks could be material in 2017

As I noted in my late November note, Brookfield has continually traded at a minimum 30% discount to its GAAP and IFRS book value. Management noted on the Q4 earnings call that this discount represented a fantastic investment opportunity, with management purchasing 2.8m units in 2016 and 1.7m units repurchased in Q4'16 alone. I believe management remains a bit perplexed at the wide discount to NAV, and the company continues to evaluate strategic options that may unlock value, including a REIT conversion--though this action is on hold pending changes in the US tax code. Without a corporate structure change, I believe the company will allocate a significant amount of funds to highly accretive repurchases.

2017: Dry powder of $1-2 billion

Management plans to use $1-2 billion from mature asset sales in 2017 to redeploy into new investments and developments in core office and retail properties. Brookfield has demonstrated the ability to earn exceptional returns on its capital by utilizing a contrarian investment strategy. A prime example is demonstrated by General Growth Properties' (NYSE:GGP) investment in five Macy's (NYSE:M) stores that GGP will repurpose (BPY owns 29% of GGP and may eventually acquire the entire entity).

Additionally, BPY has committed $2.3 billion in capital to Brookfield's (NYSE:BAM) $9 billion global opportunities fund. The fund will provide BPY exposure to high-growth investments with the opportunity for strong capital appreciation in addition to the income generation that is provided by the firm's core property portfolio.

Demand in Brookfield Property's core markets like New York City and London continues to be robust, and I suspect we will see Brookfield diversify away from these markets going forward. We've already begun to see this in the fourth quarter in which some of BPY's largest investments were in self-storage, Chicago, and a hospitality REIT that isn't publicly traded.

Capital deployment and repurchases are 2017's catalysts to unlock value

In 2017, expect BPY to focus on unlocking unitholder value due to the large discount to NAV. I think there will be a few specific catalysts, particularly capital deployment that increases FFO per share. I think the primary mechanism will be unit repurchases as long as the gap to NAV remains incredibly wide.

At the same time, BPY could battle higher interest rates that force yield-driven securities like BPY to provide higher real rates of return. However, given BPY's long-term track record of value creation, I would be happy to accumulate a larger position at lower prices while units trade below book value, particularly because I am confident that management will unlock unitholder value eventually. Although the new IFRS book value has not been updated, I believe units will carry a NAV of at least $32 based on a slight increase to the IFRS value of $31/unit that BPY registered at the end of Q3.

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.

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Tagged: , Real Estate Development, Bermuda, Earnings
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