Brookfield Property Partners L.P.

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 3/5

Brookfield Property Partners L.P. is a global real estate company that primarily invests in high-quality commercial properties, including office, retail, hospitality, and industrial assets, with a strategic emphasis on large-scale operations in premier markets.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

BPYPP operates in the real estate industry, which is characterized by long-term leases and stable demand. However, the sector is sensitive to economic conditions, affecting occupancy rates and property values.

Business Description

Brookfield Property Partners L.P. (BPYPP) is a diversified, global real estate business with a focus on iconic, high-quality assets in the office, retail, hospitality and industrial segments. In short, they own office buildings, retail stores, hotels and industrial properties in multiple countries around the globe.

  • Geographic Reach: BPYPP’s portfolio is international, with a strong focus on high-barrier-to-entry gateway markets, primarily in North America, Europe, Australia, and Asia.
  • Operational Areas:
    • Core Office: Investment in high-quality office properties in key global cities.
    • Core Retail: Ownership of premium retail properties in major shopping districts.
    • LP Investments: Investments in large-scale logistics and multifamily properties.
    • Opportunistic Investments: A smaller portfolio of distressed investments.
  • Customer Base: Their clients range from global tenants, major retailers, high-tech companies, and governmental agencies.
  • Competitive Landscape: BPYPP competes with other large real estate companies, private equity firms, and real estate investment trusts (REITs). However, BPYPP focuses on high quality real estate and has a track record of generating stable revenue that its competitors do not.

Financial Analysis

BPYPP’s financial performance depends heavily on lease contracts and the value of its real estate portfolio, both which are strongly dependent on external forces.

  • Revenue Distribution: Primarily generated from leasing commercial properties with a focus on office properties. However, BPYPP has retail, hospitality, and other investment properties as well.
  • Revenue Growth: BPYPP’s revenue growth is heavily tied to market growth and their ability to increase their occupancy rates and rental prices.
  • Operating Margins: In 2022, BPYPP had a low operating margin of approximately 3%, this is because there has been an increase in operating expenses due to inflation.
  • Valuation: In June 2022, the share price was $16, which was below the low end of analysts’ consensus range. The main reason for this is that rising interest rates and inflation are negatively affecting earnings and thus the valuation of the company.
  • 2022 Earnings: BPYPP reported a net loss of $1.4 billion in 2022. FFO (funds from operations) was $1.5 billion, compared to $1.8 billion in 2021.
  • Latest results: In the latest earnings reports for Q1 2023 there was a net loss of $170 million, compared to $141.5 million in the previous quarter. Core office occupancy was 88.8% compared to 89.1% in the previous quarter.

Core Retail showed growth of approximately 8% in revenue when compared to the same period of the previous year.

During the latest earnings call, the management said that they are seeing improvements in their operating income, and they are also improving their rent growth and occupancy numbers. They also stated that there has been improved demand for their properties, leading them to believe that the recovery will continue in 2023 and beyond.

Management also stated that their capital plan has changed to be less focused on sales and more on operations as a result of volatile market and economy conditions. They will focus more on building their portfolio of high quality properties, rather than selling them.

Moat Analysis

BPYPP’s moat strength is weak at 2/5.

  • Intangible Assets: BPYPP has a wide portfolio of iconic properties located in premium locations. While these are extremely high quality, most are highly replicable, meaning they don’t give a major advantage.
  • Switching Costs: BPYPP’s properties often have very long lease terms. This can be looked at as a switching cost for the customers, however this mostly only affects the very best properties and the lease terms are often long for its competitors as well.
  • Network Effects: In a typical mall, a network effect applies to how many stores are in it and thus the more stores are in it, the more value the mall brings. However, they are not the direct owners of most of the brands and retailers, and thus the network moat has limited effect on BPYPP.
  • Cost Advantages: BPYPP cannot have a low cost strategy, as their properties are located at prime locations and typically use high quality material. So cost advantages do not give the business an advantage.

Moat Risks and Business Resilience

There are several risks that can harm BPYPP:

  • Economic Cycles: BPYPP is particularly sensitive to changes in economic growth. During recessions, occupancy rates can decline, leading to lower rental income and property valuations.
  • Interest Rate Risk: The increase in interest rates means that companies who rely on debt financing can have more trouble operating and it also increases their WACC.
  • Inflation Risk: When inflation increases, the value of assets tends to decline, because real estate values are tied to the current market’s price/earnings ratio which declines during inflation.
  • Competition: As companies seek premium and high-quality real estate, they may end up offering competing alternatives to BPYPP.
  • Regulatory Changes: Changes in zoning and tax laws can affect profitability.
  • Global Events: Geopolitical risks such as the Russo-Ukraine War or trade sanctions can affect a property’s profitability and stability, as well as the stability of the market the property is located in.

BPYPP’s resilience to these risks is relatively low because of its high reliance on external factors and a long term investment structure. These risks are highly impactful on the share price of BPYPP.

Understandability: 4 / 5

BPYPP is a company that owns and manages real estate assets, particularly office buildings, shopping centers, hotels, and industrial properties. This is generally easy to understand because most people can understand real estate investments. However, the accounting can be very complicated and the impact of macroeconomic factors on the business is not always intuitive.

Balance Sheet Health: 3 / 5

BPYPP has a large debt burden which is offset by high-value, long-term assets and a high credit rating. However, a majority of their properties are illiquid meaning they can’t convert these into cash quickly. BPYPP’s long term debt is around 65%, and their current debt is around 20% of their assets. This is quite high, and it makes the company more vulnerable to economic down turns.

  • Assets: Primarily comprised of high-value real estate properties, and there is a large amount of goodwill and other intangible assets (as a result of past acquisitions).
  • Liabilities: Heavy reliance on debt financing and are subject to interest rates and market fluctuations.
  • Equity: Is heavily impacted by value fluctuations and write-offs due to the accounting treatment of goodwill.