Brookfield Property Partners LP (BPY) CEO Brian Kingston on Q4 2018 Results - Earnings Call Transcript

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About: Brookfield Property Partners L.P. (BPY)
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Earning Call Audio

Brookfield Property Partners LP (NASDAQ:BPY) Q4 2018 Earnings Conference Call February 7, 2019 11:00 AM ET

Company Participants

Matthew Cherry - Senior Vice President of Investor Relations and Communications

Brian Kingston - Chief Executive Officer

Bryan Davis - Chief Financial Officer

Sandeep Mathrani - Global Head of Retail Real Estate

Ric Clark - Chairman

Conference Call Participants

Sheila McGrath - Evercore ISI

Mark Rothschild - Canaccord Genuity

Mario Saric - Scotiabank

Sam Damiani - TD Securities, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Brookfield Property Partners Fourth Quarter and Full-Year 2018 Financial Results Conference Call. As a reminder, today's call is being recorded.

It is now my pleasure to turn the call over to Mr. Matt Cherry, Senior Vice President of Investor Relations and Communications. Please go ahead, sir.

Matthew Cherry

Thank you and good morning. Before we begin our presentation, let me caution you that our discussion will include forward-looking statements. These statements that relate to future results and events are based on our current expectations. Our actual results in future periods may differ materially from those currently expected because of a number of risks, uncertainties and assumptions. The risks, uncertainties and assumptions that we believe are material are outlined in our press release issued this morning.

Also announced this morning is our intention to launch a substantial issuer bid to repurchase up to an aggregate of $500 million of BPY units and class A shares of Brookfield Property REIT, or BPR. Specific details on how investors can participate in the SIB will be made available within the next week.

With that, I'll turn the call over to Chief Executive Officer, Brian Kingston.

Brian Kingston

Thank you, Matt, and good morning, everyone. And thank you for joining our call today. With me on the call are Ric Clark, Chairman of BPY; Bryan Davis, our CFO; and Sandeep Mathrani, our Global Head of Retail Real Estate. Following our prepared remarks today, we would be happy to take questions from any of our analysts that are on the call.

For those of you who have followed Brookfield Property Partners over the course of 2018, you will have observed that it was a transformative year for the company. We grew our earnings, continued our capital recycling initiatives, and completed the acquisition of GGP.

Over the past five years, we have worked hard to consolidate our ownership in our various operating businesses and completed the privatization of five publicly listed companies, which now provides us tremendous operating flexibility and access to free cash flow.

With these important initiatives out of the way, we're now in a position to dedicate increasing amounts of our capital to repurchasing our own units, if they trade at a substantial discount to their underlying value. Accordingly, this morning, as Matt mentioned, we announced our Board has approved the launch of a substantial issuer bid to repurchase up to $500 million of our own units.

Over the past 12 months, we have disposed of more than $8 billion of real estate assets, generating $3.6 billion of net proceeds at our share and at prices that were 5% about our IFRS carrying value. Utilizing just $500 million of those $3.6 billion of proceeds to repurchase our units and shares at a 30% discount to IFRS will create almost $250 million of value for our remaining unitholders.

There is no other investment available to us that will generate returns that high. Should our units continue to trade at such a discount following the completion of this offer, we will continue to dedicate more capital to buying them back?

Many of you may have seen that last week Brookfield announced the closing of our largest real estate fund to date at $15 billion of total equity commitments, which included $1 billion from BPY and $2.75 billion from Brookfield Asset Management. We had previously considered a larger investment in the fund, but today believe that reallocating a substantial portion of that capital to unit buybacks is more desirable.

Recent equity market volatility has created opportunities for us to continue to put capital to work within the fund. In the fourth quarter, we closed on the acquisition of Forest City Realty Trust, a high quality portfolio of operating and development assets in high barrier-to-entry markets in the U.S.

By combining these assets with our existing office, multifamily, retail, and development platforms, we will be able to drive outsized returns from what would ordinarily be considered a core-plus asset.

With that, I'll now turn the call over to Bryan Davis for a detailed financial report.

Bryan Davis

Thank you, Brian. During the fourth quarter of 2018, BPY earned company FFO of $416 million, compared with $286 million for the same period in 2017. We benefited this quarter from a full three months of our increased ownership interest in our core retail business, some transaction-based income, and lower overall expenses.

On a per-unit basis, company FFO for the quarter was $0.43 per unit, compared with $0.41 per unit in the prior year. During the quarter, BPY earned $340 million in realized gains to reflect the earnings from the appreciation in the value of our U.S. Logistics Business, which was sold during the quarter within our LP investments. Including these realized gains, company FFO for the quarter was $833 million or $0.86 per unit compared with $708 million or $1.01 per unit in the prior period.

For a full-year 2018, we earned company FFO and realized gains of $1.7 billion or $2.09 per unit, which compares to 2017 where company FFO and realized gains was $1.5 billion or $2.12 per unit.

Our net income, attributable to unitholders for the quarter, was $534 million or $0.55 per unit, compared with net income of $134 million or $0.19 per unit in the prior year.

This quarter, we benefited from property fair value gains of approximately $180 million, which were largely due to improved valuation metrics in Australia and Canada, as well as gains recognized in our LP investments and development assets as we near completion with them.

Our core office business earned $170 million of company FFO compared with $148 million in the prior year. Contributing to the $22 million increase were improved operating metrics with overall occupancy increasing by 90 basis points to 93.5%, which is our highest occupancy in the Company's history.

On a same-property basis, we had a similar 90 basis point increase in occupancy to 93.4%, and as a result, same-property net operating income grew by almost 5% on a currency-neutral basis. More specifically, our same-property net operating income was most pronounced in the U.S., where growth was 7%. On a year-to-date basis, we experienced same-property growth in every one of our markets.

Our recently completed developments contributed incremental FFO of $9 million, slightly lower than the run rate from previous quarters, as our recently completed multifamily development One Blue Slip in Brooklyn became operational this quarter and will take a number of months to stabilize.

These recently completed developments, including The Eugene, Brookfield Place Calgary, London Wall, and One Blue Slip, once stabilized, which we expect toward the end of 2019, will generate approximately $100 million in annual NOI.

Lastly, we benefited from $7 million in lease termination income and from lower-interest expense as we repaid a significant amount of debt in the last half of 2019 through proceeds raised from asset sales.

In our Core Retail Business, we earned $270 million of company FFO compared with $158 million in the prior year. Our increased ownership in GGP contributed to the majority of this increase.

Occupancy in this portfolio remained high at 96.5% and operating metrics were strong, with 11% initial suite-to-suite rent spreads. In addition, we also had 6% increase in tenant sales per square foot to $746 on an NOI weighted basis.

Included in our current results, we did earn $5 million from additional condominium sales at Ala Moana, and that compares with $12 million that we had earned in the prior year.

Lastly, our LP investments earned $77 million of company FFO compared with $89 million in the prior year. With significant capital returned to us on the successful sales of our stabilized Logistics businesses in Europe and the U.S. and the capital being redeployed into investments that are not yet stabilized, we did see a dip in earnings.

However, underlying that, many of our investments had significant improvements in operating income, particularly our multifamily properties in New York due to the completion of our unit renovation program; at our mixed-use complex in Seoul, Korea, where office occupancy has increased from 68% to 88%; and continued strong operating performance at Center Parcs. Included in the current quarter was a merchant build gain of $9 million from the sale of a recently completed multifamily property in California.

Almost 80% of the capital we have invested in our LP businesses in Brookfield's first and second Real Estate Opportunity Funds. These funds are currently tracking at an 18% net IRR and 1.9x multiple of capital.

In comparing our results to the third quarter of 2018, company FFO increased by $0.12 per unit from $0.31 per unit earned in that period. This increase in company FFO was primarily attributable to higher retail results, as the current prior period benefited from not only a full quarter of increased investments, but also from seasonality.

We also benefited this quarter from $20 million in transaction-based income as previously discussed and lower overall corporate expenses. With no significant change to our proportionate balance sheet, we ended the quarter with total equity of $47 billion, including $28 billion or $28.73 per unit attributable to our unitholders.

Now before we move on to questions, I did want to mention that our Boards approved a 5% increase in quarterly distribution of BPY and BPR to $0.33 per unit, payable on March 29, 2019, to unitholders of record on February 28, 2019.

We are looking forward to 2019, with the continued focus on optimizing performance in our core operating businesses, advancing our development and redevelopment pipeline, and recycling capital into higher-yielding opportunities, including dedicating capital to repurchasing our own units should they continue to trade at a meaningful discount. We are focused on creating unitholder value through these initiatives.

With those as our planned remarks, Operator, we are pleased to open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Sheila McGrath from Evercore. Your question please.

Sheila McGrath

Yes. Good morning. I was wondering on the buyback, if you could just talk about why that number was the right number and what that does to your leverage outlook for 2019?

Brian Kingston

Yes. It’s Brian. Answering your questions in reverse order, it doesn't change our outlook at all on leverage. As we sort of mentioned at the outset, the buyback is being funded really by reducing our commitment to the real estate opportunity fund. So this is just capital that we would have otherwise dedicated to other investments that we're pointing toward the buyback.

And then on the size of it, there's no real magic to the $500 million. We felt that that was an appropriate amount that demonstrated that we're serious about this, but there's no real science behind the $500 million frankly, Sheila.

Sheila McGrath

Okay. And then just a couple questions on retail. As the number of retail REITs have reported same-store NOI outlook, et cetera, I was just wondering if you could give us an update on how the GGP is performing versus your expectations, your NOI outlook – same-store NOI outlook for 2019, and if you could give us a little bit more detail on the $3 billion of that value creation opportunities that you mentioned in your letter to shareholders?

Brian Kingston

Yes. So as far as expectations, it's performing in line with what we would have expected prior to closing the acquisition. But with Sandeep here, I'm going to let him talk a little bit about 2019 and some of the development projects we have under way.

Sandeep Mathrani

Hi, Sheila. So I'd like to think back, and last year was a good year from most of the leasing perspective. We leased 9.6 billion square feet at 11% spreads. We leased a little over 2 million square feet of big-box spaces, reducing our exposure to the anchors dramatically. 2019, our expectation is to lease about 10.3 million square feet. We've actually got a little over 7.5 million square feet done, so about 74% complete. Spreads are holding nice and steady.

Our revenues for 2019 will be up, so we are pretty – and of course all this is subject to, and you've heard it now several times in other calls, the bankruptcies I think will be less than last year and the year before. And I think there are names you've heard have been on our outlook for quite some time. So I don't think we expect anything out of the ordinary, but we are still faced with some headwinds on that. And if 2018 is a goalpost, we've actually leased all the bankruptcies we got back in 2018, and so the quality of real estate speaks to itself.

On the $3 billion number, we've actually now started active development on several of our large projects. I'll give you a flavor of them. Ala Moana, we're going to do a Phase II of the condominiums and their five rental sites. So that sort of produces a large chunk of the profit. Stonestown Galleria, which is in San Francisco, we look at doing in residential. We have two properties in Atlanta which are on the list.

And so these are all started in form or fashion development. So of the review of the 75, 77 best centers in our portfolio, we've identified 35 with opportunities, and that sort of $3 billion only applies to nine of the 35. So I would say the pieces of BPY's acquisition of GGP, which was to densify the assets, is very fruit, and so we look at the next few years actually to be transitional as we start to take certain parts and pieces of shopping centers out of commission so we can build residential, office, or hotel on our properties.

Sheila McGrath

Okay. That's helpful. Since you're on the line, Sandeep, could you just comment on the Fashion Place Mall, the partial sale, kind of the interest level there? That was the one announced in Utah, and just any details on pricing, that would be great.

Sandeep Mathrani

I would sort of sit back and say that there's still active demand for A quality assets. I would say that it beat the expectations of Brookfield's pricing on this asset. So it was a very healthy price. And I would also sit back and say as we go into 2019, we're starting to see a pivot of interest from buyers of A assets, and they now view A assets to have a permanency of income. They also view, which used to be a negative, what happens to an anchor department store. That sort of has now become a plus additive.

So it almost goes in the opposite direction. Do you have a failing department store and what's the positive versus you have a failing department store, what are you going to do about it? As an example, our exposure is low. Of the 22 Sears that are closing in our portfolio, we have 19 deals done. Of the nine [Barn Towns] that closed, we have six deals done.

So high quality real estate is in demand from the retailers, and now all of a sudden this sort of negative view is fast evolving to – okay that gives a core asset a plus to it. So we're seeing really a healthy demand from joint venture partners to buy more.

In addition, we are also seeing a fantastic financing market. The CMBS market has picked up, and it's quite open to refinancing a) quality assets at I would say, as aggressively as it was in 2014 and 2015. So we're back to those levels of demand.

Sheila McGrath

Okay. Thank you. I’ll get back in the line.

Operator

Thank you. Our next question comes from the line of Mark Rothschild from Canaccord. Your question, please.

Mark Rothschild

Thanks and good morning, guys. Looking at your sources that you used as the capital, you reduced the amount that you're looking to put into the new Brookfield fund quite materially actually from what at least I was thinking before, and $500 million going to the buyback is a relatively small amount of that, although it's a large number. What is the plan with the rest of that capital that you were going to put into the fund? Obviously there's some acquisitions, but you also have quite a bit of dispositions and more on the go.

Brian Kingston

Yes. So Mark, keep in mind the commitments to the fund generally get drawn over a period of about four years, so although it is a change in the number, our plan was not to put $2.5 billion into the fund in 2019. So the buyback takes up a large portion of what we would have expected to have been deploying into the fund, or at least the delta of what we would have been expecting to put into the fund over the course of 2019.

Then as far as the future years, I do think Sandeep touched on a couple of the opportunities within retail, but we do have a number of other investment opportunities, whether it's putting things into developments or redevelopments of malls or on the office side, as well.

So I think the difference will be invested in a combination of both the buyback, as well as some of these other investment opportunities where we think we can get good returns. But it's largely fungible, and it takes place over four years. It's not all in 2019.

Mark Rothschild

Yes. Understood, and in regard to the buyback, last quarter you seemed to be a little more reluctant to do it, and I realize you had just closed GGP at that point, but did something change in the last few months? Unit price is pretty much – yesterday it was around where it was three months ago. So did anything change in the past few months to make you want to do it, or is just the timing worked now?

Brian Kingston

Yes. No, nothing changed.

Mark Rothschild

Okay, great. Thank you.

Brian Kingston

Okay.

Operator

Thank you. Our next question comes from the line of Mario Saric from Scotiabank. Your question, please.

Mario Saric

Hi, good morning.

Brian Kingston

Good morning.

Mario Saric

Just coming back to capital allocation, what's the identified target in terms of net proceeds from asset sales in 2019?

Brian Kingston

I think it will be pretty similar to the last couple of years. So in the order of $2 billion to $2.5 billion, sometimes we're a little higher more opportunistic if something comes along, and so I think 2018 was a little higher number than that because of a couple of specific opportunities. But on a general run rate basis, we're usually looking to do $2 to $2.5 billion a year of net proceeds.

Mario Saric

Okay. And then I guess turning to BSREP III, your commitment of $1 billion is about 7% of the total capital committed. So, when we think about acquisition opportunities going forward, is it fair for us to assume that a majority of – outside of the redevelopment stuff that you talked about. Is it fair to assume that a majority of the acquisition growth will be done through your proportionate interest in BSREP III similar to what's happened in the past with BSREP I and II, or are there opportunities for BPY to perhaps increase their co-investments on specific transactions within the fund going forward?

Brian Kingston

Yes. Look our percentage commitment to the fund that's coming through BPY versus Brookfield Asset Management does not have any impact at all on the deals that would or wouldn't have gone into the fund. So I'd say from that perspective, nothing changes.

The same deals that would've gone into the fund will still go into the fund. The difference being just that BPY has some of the capital that we were otherwise planning to dedicate to that available to us to fund some of these other things that were ordinarily going to be in the fund anyway.

Mario Saric

Got it. Okay. So broadly speaking, the investment activity will still go through BSREP III outside of, again, redevelopment initiatives that you have at the BPY level?

Brian Kingston

Yes, for the most part. Yes, that's right.

Mario Saric

Okay. And then just maybe shifting gears back to the value creation potential that you identified at GGP at nine – I guess nine of the malls. Of the $3 billion of potential upside, can you maybe share a bit of color in terms of how much of that you're planning to come from condo development versus let's say increasing the NOI – the retail NOI at the asset or building out other types of real estate at the assets versus perhaps seeing a better valuation for the overall mall given the change in mix, just a bit of color in terms of where that $3 billion is coming from?

Sandeep Mathrani

So, kind of ironic, the condo sales were just about $100 million of the $3 billion, so it's predominantly all NOI growth. And we really haven't factored in the shadow impact on the retail properties, which they should be when you build these mixed-use developments. So this is pure return on investment – on capital investment for rental properties. So very little is condo; almost all of it is rental.

Mario Saric

Okay. And then in order to generate the $3 billion, what type of capital outlay would you suggest we think about?

Sandeep Mathrani

At 100%, it's $6 billion. So our share would be a lot less.

Mario Saric

Got it. Okay. And then in terms of timing, you've gone through the 75 malls. So, the 35 opportunities that you identified, how should we think about completion of those 35 opportunities over time, and then maybe even these nine that you've identified that pertain to the $3 billion?

Sandeep Mathrani

So I'd like to just focus on these nine. So we start to see them go into construction in 2020, 2021, and so we would sort of sit back and say by 2023, 2024 these nine will be complete. Really don't have a timeline for the other 2025 or so. We'll have a better idea as the year goes on, but we're very focused on getting these nine into the ground.

Mario Saric

Yes, okay. And then my last question just maybe shifting gears to the quarterly results and maybe a question for Bryan Davis. The investment fees and the other revenue component of the results was about $140 million, so that was double the Q4 2017 print, almost double the Q3 2018 print. I think you identified about $20 million of transaction fees on the retail side during the quarter, but how should we think about the sustainability of that $138 million going forward?

Bryan Davis

Yes, just to clarify, I did identify $20 million in transaction income. It's not just retail. It was a combination of termination income, condominium sales, and then the last one was a merchant build gain. As it relates specifically to fee income, we didn't really see anything that was materially lumpy in this quarter.

We do get the benefit of, of course, an increased ownership in our Core Retail and the associated fees with that business. In addition, there's incremental fees on that business as a result of the JVs that were created to raise the capital. So absent maybe some leasing transaction and some development fees that we earn, it should be sustainable going forward.

Mario Saric

Okay. That’s great. Thank you.

Operator

Thank you. Our next question comes from the line of Sam Damiani from TD Securities. Your question please.

Sam Damiani

Thank you, and good morning. Just with the benefit of I guess four months or five months hindsight after the September investor update, how do you look at the five-year goal of dividend growth and FFO growth, given the changes in capital allocation that we've seen so far?

Brian Kingston

Well, you know, our business doesn't move quite that fast, Sam. So, I'd say our outlook is still intact. I think our plan has been for the last five years and will be for the next five years, as well, to grow earnings at 7 to 9 and grow our distribution between 5% and 7%. So I don't think anything that's happened over the course of the last three of four months has changed any of that.

Sam Damiani

Okay. Thank you for that. Just on the retail, as you take space out of service over the next few years, how much of that is going to be anchor space versus high rent-paying CRU space?

Brian Kingston

I would say most of it is anchor space, and most of it sort of sits in parking lots and parking decks. Very little of it is in line space, although there is a sort of, I guess, a shadow impact on in-line space when you do take an anchor space out. So you do start to see some negative impact. But we're not really taking out in line space, although you will have an impact just purely because it's a development going on next door.

Sam Damiani

Thank you. One last one if I could. Just on the London market, if you could provide a bit of an update as to what's sort of going – happening on the ground today in terms of leasing and transactions?

Brian Kingston

Surprisingly, I think for those who are not in London on a daily basis, activity and sentiment generally in the market is pretty good, notwithstanding some of the headlines and turmoil that seems to be happening on a political front over there. So, we've actually seen pretty good leasing momentum within Canary Wharf, as well as in our city portfolio. And although we don't really have any assets in the market right now, so this is more – I'd say, anecdotal or in speaking to appraisers, et cetera, in the market, there does seem to still be quite a bit of offshore, in particular, appetite for London office buildings.

So it appears as though the investment market is robust. I'd say I would expect January, February, and March of this year, it's going to be slower than the last quarter of 2018, but I think surprisingly the market feels pretty resilient right now.

Sam Damiani

Great. Thank you.

Brian Kingston

Okay.

Operator

Thank you. [Operator Instructions] Our next question is a follow-up from the line of Sheila McGrath from Evercore. Your question, please.

Sheila McGrath

Yes, I was wondering if you could give us an update on Manhattan West progress on that project and the news that you'll probably start another tower there.

Ric Clark

Yes, sure. Sheila, it's Ric. Manhattan West has been incredibly successful for us. On the office front, there's about 4 million square feet of office space there and with the ground-up tower at One Manhattan West being completed later this year. So among that 4 million square feet, we're 92% leased, plus or minus.

We've got very robust activity of a couple of million feet. So with that, given our location is right across the street from the most heavily trafficked train station in this part of the world. We've decided that we are going to build the South Tower. So it's another 2 million square feet coming on.

I think the thing that is appealing to tenants in the market about that is when this tower is done. Our 7 million square foot project is 100% finished. Those tenants won't be living in a construction zone. So, lots of successes on the office front. We've been doing a lot of retail leasing, and our apartment buildings should hit stabilization in the upcoming quarter. So, it's just a lot of good news there.

Sheila McGrath

Okay, great. And then any comment on Greenpoint or an update there and your thoughts if Amazon is successful at relocating to Long Island City, impact on that project?

Brian Kingston

So, when we went into – I'd like to say we knew about the Amazon decision before we invested here. And just without the Amazon decision, it's been a good success for us. So One Blue Slip, which opened a few months ago, is now just shy of 30% leased. We're signing between 20 and 30 leases a month. This is the slow season, so that's really encouraging.

Just anecdotally, and I'll get these numbers a little bit wrong because I'm doing off memory, but when Amazon committed to Downtown Seattle, their initial commitment was about a million square feet. And today, which is roughly nine years after that initial commitment, I think they're in 10 or – somewhere between 10 million and 14 million square feet.

So their growth has been exponential. We would expect the same thing in New York City. We're just a few minutes away from that campus with our investments in Greenpoint. So to say that we're excited about that decision is an understatement, but I think it's a really big thing for New York City. Each Amazon job results in another three or four jobs created, so this is kind of big news, and we will benefit for sure.

Sheila McGrath

Okay, great. Just two more quick ones, if you could just give us a little bit more detail on the IDI Logistics sale. Is a cap rate relevant there, or was it just the whole platform or maybe the equity multiple?

Brian Kingston

Yes, Sheila. So the business consisted of both operating assets and development assets. And so a cap rate is a little tricky to give you, only because it depends on how you allocate value between the two of them. But on our math, it was a sub 5% cap rate on the income-producing assets. From our investment perspective, resulted in a little over a 20% return and 2.5 times our original investment from sort of start to finish over about a six-year period.

Sheila McGrath

Okay, great. And one last one, just you were in the press, and I think you did comment on one of the calls, looking at that European retail acquisition and then that fell away. Is that reflective of your view on caution on Europe or the valuation or if you could just give us a little color on that transaction, what happened there?

Brian Kingston

There's a lot of reasons why transactions come and go, and we look at a lot of things that we don't ultimately end up completing. I think the only thing that was unique about the one that you're referencing is that it typically ends up being public a lot earlier on in the process in the UK than it might otherwise in other markets that we operate in.

So I think I'd say there's nothing specific that I would point to. As you know, we're positively disposed toward the UK in the long-term, and we're positively disposed to the retail sector. It was a logical one for us to look at, but as I say, there's always a lot of reasons why transactions don't come together. We just don't typically see it in the press every day.

Sheila McGrath

Okay. Thank you.

Brian Kingston

Okay.

Operator

Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Brian Kingston, CEO, for any further remarks.

Brian Kingston

Okay. Thank you for joining our call again this quarter, and we look forward to providing you an update following Q1. Thanks everyone.

Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.