Pedestrians walk past Brookfield Place in New York on May 9, 2020.Frank Franklin II/The Associated Press
What is your opinion of Brookfield Property Partners LP? Do you think its yield is sustainable?
As an owner of real estate including shopping malls, office buildings and hotels, Brookfield Property Partners (BPY.UN) has taken a direct hit from the novel coronavirus. The units have plunged about 37 per cent this year, which has pushed the yield up to about 12 per cent – a level that normally signals substantial risk of a distribution cut.
Given the leverage inherent in real estate and the highly uncertain course of the pandemic, BPY’s units are “only suitable for more risk tolerant investors, in our view,” Neil Downey, an analyst at RBC Dominion Securities, said in a research note published in May.
That said, there’s a case to be made that the dividend may be secure despite the outsized yield, Mr. Downey said.
When BPY released first-quarter results in May, it maintained its quarterly distribution at 33.25 US cents and offered no hint of a potential cut. In a letter to shareholders, chief executive officer Brian Kingston stressed that BPY’s “distribution policy is based on the long-term view of our business, with a healthy respect for the cyclicality of economic and real estate cycles.”
Mr. Kingston added that, “while a prolonged economic contraction would impact cash flow in the longer term, we continue to have more than sufficient resources to pay our stated quarterly dividend.”
There is also some history in the Brookfield family that may add some perspective.
In 2007, before the financial crisis, Brookfield Office Properties (which was privatized by BPY in 2014) traded for more than US$30 a share. By March, 2009, the shares had plummeted to about US$5. Yet the company maintained its dividend throughout the crisis. During that time the yield soared from a low of 2 per cent to a high of 11 per cent, before it eventually fell to 3 per cent at the time of privatization.
Maintaining BPY’s distribution may also be in the best interest of its parent, Brookfield Asset Management Inc. (BAM.A). BAM’s 55-per-cent stake in BPY generates annual cash distributions of about US$700-million, and the parent “places a high value on the optionality of this cash,” which it can deploy into other investments or use to repurchase shares of BPY or BAM, Mr. Downey said.
Moreover, if BPY were to cut its payout, BAM would potentially lose up to US$57-million of “incentive distributions,” which BAM is entitled to receive when BPY’s distribution is above certain levels.
Maintaining the distribution is manageable, other analysts said. In a May note, CIBC World Markets analyst Dean Wilkinson projected that, assuming no change in the distribution, BPY’s payout ratio will soar to 132 per cent in 2020 and 104 per cent in 2021. But that would not be cause for panic, he said.
“We believe it is important to note BPY has ample liquidity to cover these shortfalls in the near term, and the elevated payout ratio should come down quickly over the next two years as the recovery progresses,” Mr. Wilkinson said.
Both Mr. Downey and Mr. Wilkinson have “outperform” ratings on BPY units. At the time of his report, Mr. Wilkinson estimated that BPY’s units were trading at an “overly punitive” discount of 64 per cent to the estimated net asset value of its properties.
Even as the coronavirus pandemic has accelerated, BPY’s unit price has gained about 28 per cent over the past three months. This may signal that some investors are starting to look past the pandemic, perhaps encouraged by news about potential vaccines. BPY’s announcement on July 2 that it intends to repurchase up to 74.2 million units for US$12 each may have also helped. BPY closed Friday at US$11.05 on the Nasdaq Stock Exchange and $14.81 on the Toronto Stock Exchange.
Buying assets when they are out of favour can be a profitable investing strategy. But the long-term consequences for malls, offices and hotels are highly uncertain given the unpredictable nature and duration of the pandemic. Keep these risks in mind before you take the plunge with BPY’s 12-per-cent yield.
I have a portfolio of stocks with an adviser at one of the banks who charges an annual fee of 1 per cent based on the value of the assets. At a different institution I hold mutual funds that charge management expense ratios of about 2 per cent. I am told that I can deduct the 1-per-cent management fee for tax purposes but not the 2-per-cent MERs of the funds. Is this true? If so, how is that fair?
Yes, it’s true and it’s actually fair. Because you pay the bank adviser out of your own pocket to manage your account, the fee qualifies as a “carrying charge” and can be claimed on your return. With mutual fund MERs, however, the management fee and other costs are deducted automatically from the fund, which reduces your return and, therefore, the amount of tax you pay. If you were also allowed to deduct the funds’ MER as a carrying charge, you would effectively be deducting the costs twice. Also note that management fees are only deductible when the investments are held in a non-registered account.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
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