Key points:
Q2/23 Distributable Earnings/share (DE) (before realized carried interest and disposition gains) of US$0.64 was well ahead of our US$0.51 forecast due to higher-than-forecast distributions from perpetual affiliates (Property specifically) and Asset Management FRE attributable to BN and lower-than-forecast corporate expenses/taxes.
Key takeaways from Real Estate segment: (1) BN believes it could be 1-2 years before Real Estate FFO matches the distributions it pays up to BN; (2) after substantially declining Q/Q for the past year, FFO in Real Estate was largely flat Q/Q and may be showing early signs of stabilizing; (3) the IFRS fair value of BN’s Real Estate investments was largely flat Q/Q. However, there were notable Q/Q declines in the equity values within Core Office (-6% for Downtown NY and -5% for London); (4) NOI growth in Core was +8% Y/Y; and (5) within Office, BN said leasing activity and pipeline are robust with 1.2MM ft of leasing activity completed in Q2/23 with rents higher than those expiring and within Retail, leasing spreads are up over 15% Y/Y so far in 2023.
BN indicated that given the wide discount to NAV, a substantial issuer bid remains an option, but also that the investing environment is offering many opportunities to generate potentially abnormally higher- than-normal investment returns.
Maintaining our Outperform rating, but trimming our price target to US $50 (was US$52), reflecting a slightly wider discount to NAV assumption (15%, was 10%). While we think BN’s discount to NAV can narrow to its historical average of an ~8% discount to NAV (or better), with the current discount to NAV at 31%, we expect the discount to NAV to narrow over the next year, but not to the degree we previously expected.