Rating Update: Stock Rating C-Neutral (1/2/20)-Brookfield Property Partners LP (BPY).

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BUSINESS

Brookfield Property Partners is one of the world’s premier commercial real estate companies, with approximately $69 billion in total assets. We are leading owners, operators and investors in commercial real estate, with a diversified portfolio of premier office and retail assets, as well as interests in multifamily, triple net lease, industrial, hospitality, self-storage, student housing and manufactured housing assets. Brookfield Property Partners is listed on the Nasdaq stock market and the Toronto stock exchange. Further information is available at bpy.brookfield.com. Brookfield Property Partners is the flagship listed real estate company of Brookfield Asset Management, a leading global alternative asset manager with over $285 billion in assets under management.
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INVESTMENT RATING

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BPY is expected to continue to be Value Creation neutral reflecting capital returns that are forecasted to be in line with the cost of capital.

BPY has a current Value Trend Rating of C (Neutral).
This rating combines contradictory signals from two proprietary PTR measures of a stock’s attractiveness. BPY has a slightly positive Appreciation Score of 68 but a poor Power Rating of 27, leading to the Neutral Value Trend Rating.

BPY’s stock is selling well below targeted value. The current stock price of $18.06 compares to targeted value 12 months forward of $27.
This moderately high appreciation potential results in an appreciation score of 68 (only 32% of the universe has greater appreciation potential.)
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BPY has a Power Rating of 27. (This poor Power Rating indicates that BPY only has a higher likelihood of achieving attractive investment performance over the near to intermediate term than 27% of companies in the universe.)
Factors contributing to this poor Power Rating include: is currently in an unfavorable positi; the trend in BPY’s earnings estimates has been unfavorable in recent months; and recent price action has been neutral.

INVESTMENT PROFILE

BPY’s financial strength is high. Financial strength rating is 76.
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Relative to the S&P 500 Composite, Brookfield Property Partners LP has significant Value characteristics; its appeal is likely to be to investors heavily oriented toward Income; the perception is that BPY is higher risk. All factors are relative weaknesses. Relative weaknesses for BPY include: low forecasted profitability, low expected growth, low historical growth, and high earnings variability. BPY’s valuation is low: high dividend yield, low P/E ratio, and low price/book ratio. BPY has unusually low market capitalization.

CURRENT SIGNALS

BPY’s current operations are strong. Return on equity is rising, reflecting: improving asset utilization; widening pretax margins; rising tax keep rate; and rising leverage.

BPY’s current technical position is mixed. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average.

ALERTS

Recent minimal positive changes in fundamentals have benefitted Brookfield Property Partners LP (NASDAQ: BPY): significant quarterly earnings acceleration occurred.
The stock is currently rated C.
On 1/2/20, Brookfield Property Partners LP (NASDAQ: BPY) stock enjoyed a major increase of 92.8%, closing at $0.02. Moreover, this advance was accompanied by above average trading volume at 143% of normal. The stock has performed in line with the market over the last nine months and is unchanged during the last week.

CASH FLOW

In 2018, BPY generated a very significant increase in cash of +$2,191 million (+127%). Sources of cash were much larger than uses. Cash generated from 2018 EBITDA totalled +$3,094 million. Non-operating sources contributed +$619 million (+20% of EBITDA). Cash taxes consumed -$591 million (-19% of EBITDA). Re-investment in the business amounted to -$28,725 million (-928% of EBITDA). On a net basis, debt investors furnished +$23,602 million (+763% of EBITDA) while equity investors furnished +$4,192 million (+135% of EBITDA).
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BPY’s Non-operating Income, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Brookfield Property Partners Lp Peer Group. (Since 2016 Non-operating Income, %EBITDA has experienced a very sharp recovery.) In most years, BPY was in the top quartile. Currently, BPY is at the upper quartile at +20% of EBITDA (+$619 million).

BPY’s Cash Taxes, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Brookfield Property Partners Lp Peer Group. In most years, BPY was in the lower quartile and top quartile. Currently, BPY is lower quartile at -19% of EBITDA (-$591 million).

BPY’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Brookfield Property Partners Lp Peer Group. (Since 2016 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, BPY was in the third quartile. Currently, BPY is lower quartile at -928% of EBITDA (-$28,725 million).

BPY’s Debt Investors, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by an opposite trend for the Brookfield Property Partners Lp Peer Group. In most years, BPY was in the top quartile and second quartile. Currently, BPY is upper quartile at +763% of EBITDA (+$23,602 million).

BPY’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Brookfield Property Partners Lp Peer Group. (Since 2016 Equity Investors, %EBITDA has accelerated very sharply.) In most years, BPY was in the second quartile and top quartile. Currently, BPY is upper quartile at +135% of EBITDA (+$4,192 million).

BPY’s Change in Cash, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Brookfield Property Partners Lp Peer Group. In most years, BPY was in the top quartile and second quartile. Currently, BPY is upper quartile at +71% of EBITDA (+$2,191 million).
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BPY’s Cash, %Revenue has exhibited a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Brookfield Property Partners Lp Peer Group. In most years, BPY was in the third quartile and second quartile. Currently, BPY is at median at +54%.

PROFITABILITY

BPY’s return on equity has eroded very significantly since 2010.
A major analytical focus for BPY is a very strong negative trend in pretax operating return a significantly augmented by very strong negative trend in non-operating factors.
The productivity of BPY’s assets declined over the full period 2009-2019: asset turnover has experienced a downtrend.
Reinforcing this trend, pretax margin experienced a very strong overall downtrend although it experienced a very sharp recovery after the 2016 low.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
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BPY’s return on equity is unavailable for the four quarters ended September, 2019.
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Operating performance (pretax return on assets) is slightly above median (2.5%) reflecting asset turnover that is above median (0.08X) and slightly above median pretax margin (32.9%).
Tax “keep” rate (income tax management) is lower quartile (23.7%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is unavailable .

GROWTH RATES

There are no significant differences between Brookfield Property Partners’ longer term growth and growth in recent years.
Brookfield Property Partners’ historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has fallen short of equity growth.

Annual revenue growth has been -10.8% per year.

Total asset growth has been -9.7% per year.

Annual E.P.S. growth has been -30.1% per year.

Equity growth has been -22.4% per year.

Brookfield Property Partners’ consensus growth rate forecast (average of Wall Street analysts) is 3.1% — substantially above the average of the historical growth measures.
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Relative to the Brookfield Property Partners Lp Peer Group, BPY’s historical growth measures are generally lower quartile. Revenue growth (-10.8%) has been substantially below median. Total asset growth (-9.7%) has been lower quartile. E.P.S. growth (-30.1%) has been lower quartile. Equity growth (-22.4%) has been lower quartile.

In contrast, consensus growth forecast (3.1%) is slightly above median.
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PRICE HISTORY

Over the full time period, Brookfield Property Partners LP’! stock price performance has been significantly below market. Between April, 2013 and January, 2020, Brookfield Property Partners LP’! stock price fell -18%; relative to the market, this was a -60% loss.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 21.5% is below median relative to the S&P 500 Composite.
In addition to being below median relative to S&P 500 Composite, current annual total return performance through December, 2019 of 21.5% is at median relative to Brookfield Property Partners LP Peer Group.

Current 5-year total return performance of 1.2% is lower quartile relative to the S&P 500 Composite.
Through December, 2019, with lower quartile current 5-year total return of 1.2% relative to S&P 500 Composite, BPY’s total return performance is lower quartile relative to Brookfield Property Partners LP Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, BPY’s overall valuation is normal. The highest factor, the ratio of enterprise value/revenue, is upper quartile. Ratio of enterprise value/earnings before interest and taxes is lower quartile. Price/earnings ratio is lower quartile. Ratio of enterprise value/assets is lower quartile. Price/equity ratio is unavailable.
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BPY has a major value gap compared to the median. For BPY to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 7.53X to 12.46X. If BPY’s ratio of enterprise value/revenue were to rise to 12.46X, its stock price would be higher by $92 to $110.
For BPY to achieve upper quartile valuation relative to the Brookfield Property Partners LP Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 7.53X to 33.64X. If BPY’s ratio of enterprise value/revenue were to rise to 33.64X, its stock price would increase by $488 from the current level of $18.

VALUE TARGETS

BPY is expected to continue to be Value Creation neutral reflecting capital returns that are forecasted to be in line with the cost of capital.
Brookfield Property Partners LP’ current Price Target of $27 represents a +52% change from the current price of $18.06.
This moderately high appreciation potential results in an appreciation score of 68 (only 32% of the universe has greater appreciation potential.)
Notwithstanding this moderately high Appreciation Score of 68, the low Power Rating of 27 results in an Value Trend Rating of C.
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Brookfield Property Partners LP’ current Price Target is $27 (+1% from the 2018 Target of $27 and +52% from the 01/02/20 price of $18.06). This plateau in the Target is the result of a -6% decrease in the equity base and a +7% increase in the price/equity multiple. The forecasted increase in return on equity has a slight positive impact on the price/equity multiple and the forecasted decline in growth has a slight positive impact as well. Partially offsetting these Drivers, the forecasted increase in cost of equity has a slight negative impact.
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PTR’s return on equity forecast is 8.9% — in line with our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is well below the 2011 peak of 16%.

PTR’s growth forecast is 3.0% — slightly above our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2010 and 2018. The current forecast is significantly below the 2012 peak of 19%.

PTR’s cost of equity forecast is 8.2% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, erratic decline between 2010 and 2018. The current forecast is below the 2011 peak of 11.9%.
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At Brookfield Property Partners LP’! current price of $18.06, investors are placing a negative value of $-10 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of -2.0% per year, and a return on equity of 8.2% versus a cost of equity of 7.6%.
PTR’s 2020 Price Target of $27 is based on these forecasts and reflects an estimated value of existing assets of $26 and a value of future investments of $1.

About John Lafferty 77149 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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