BPY updates

BPY quickly sold off upon posting the idea, along with other REIT’s and interest rate sensitive stocks. The current price (21.50) now reflects a 4.65% yield (which management forecasts to grow at 3-5% annually) and an updated BV multiple of 0.88x . Wells Fargo had a note on parent BAM dated 4/4/13 which calculated the BV based on current market prices of the components of BPY. At that valuation date the price of BPY was 23.95. Even after this spectacular sell off we have seen in the space, BPY continues to get cheaper.

BPY Model

Perhaps one of the criticism of BPY as explained in the Wells Fargo note, is the rationale for owning this entity versus the component entities (GGP, BPO, RSE) While the current value is simply the sum of these components, the management presentation states that BPY will allow retail investors access to the strategic real estate transactions such as investments in Canary Wharf. More importantly, Brookfield had taken advantage of the depressed real estate prices in 2008 & 2009 and have “built in” growth via increases in rent from the excellent prices they were able to offer to initial tenants. See Pg 19 & 20 of Investor Presentation. 

I believe that once the market realizes that this entity has delivered 16% per year returns for investors, with some of the other spinoffs performing even better, that the discount to book value will become a premium. The worst case scenario is it may take a few deals under the belt to get investors comfortable.

Speaking of worst case scenarios, the recent spike in interest rates and volatility is unfortunate as it makes investments in REIT’s less attractive to safer bonds. This is a very valid argument and a development that needs to be watched closely, but not only for this investment, but for all stocks. I can’t predict exactly with any accuracy the direction of interest rates, my only contributions are anecdotal evidence that the Real Estate market in the North East remains quite hot and I would think that any turn in the underlying fundamentals of Real Estate would take awhile to show in asset prices. That said, a pair trade with IYR or another REIT or even short bonds would probably make sense.

BPY updates