Post by
retiredcf on Sep 13, 2023 9:14am
RBC
Their upside scenario target is US$62.00. GLTA
September 13, 2023
Brookfield Corporation
We’re Not Gonna Take It: Investor Day Highlights
Our View: BN’s shares trade at a 30% discount to NAV, substantially wider vs. historical and we think largely driven by investor concern regarding BN’s Real Estate portfolio, some of it legitimate and some appear to be overdone. Outside of the underperforming parts of BN’s Real Estate book, we think BN’s various segments are performing for the most part very well. Consequently, we think BN’s Investor Day presentation focused on a few themes that support this view and perhaps could be described by a certain Twisted Sister song: (1) Insurance could be a significant driver of value creation; (2) investor concern regarding Real Estate is overdone, particularly in BN’s Core portfolio, which seems to be performing well as well as BN’s LP investments in the BSREP Flagship Real Estate funds; and (3) carried interest should grow significantly in the coming years, which should benefit BN’s valuation. BN is our #3 best idea and we maintain our Outperform rating, but due to recent declines in the share price of its publicly traded investments, our target is reduced to US$48 (was US$50).
Key points:
Key takeaways (see pp. 3–15 for key exhibits from BN’s presentation). Please see our 2023 BAM Investor Day note here for additional details.
• Financial targets and other takeaways: (1) BN is guiding to a 5-year CAGR of +17% for its Plan Value/share and +25% for Distributable Earnings (DE); (2) BN is targeting realized carried interest from existing funds to increase from US$1.3B in 2024 to US$2.8B in 2027; and (3) a substantial issuer bid remains a possibility, but would likely require a meaningful monetization in our view.
• Real Estate:
US$34B on BN’s balance sheet (US$14B Core, US$7B Transitional
& Development (T&D), US$10B LP/Direct Investments and US$3B Residential). Of the US$24B (excl. LP/Direct Investments), BN forecasts this to decline to US$15B in 2028.
-
BN said it completed all 2023 debt refinancings with minimal liquidity impacts and expects this to continue.
-
US$14B in Core is 47% Luxury Retail, 41% Premier Office, 8% Luxury Residential and Hotels and 4% Luxury Urban Retail represented by 10 Trophy Offices and 19 Shopping Centers. In aggregate (Office + Retail), Core is currently generating +6% SS NOI growth; 96% occupancy; 49% loan-to-value (LTV); and 8-year avg. lease life. BN said SS NOI growth is being driven by increasing occupancy rates, contractual rent increases and mark-to-market leases (BN estimates Core leases are ~12% below market on average, so there’s an opportunity to significantly increase lease rates at renewal).
Dissecting Core between Office and Retail:
o US$7.5B is Core Office & Mixed-Use (US$4.5B in North America + US$3B in
Europe/Middle East) and is currently generating +4% SS NOI growth; 95% occupancy; 55% LTV; 9-year avg. lease life.
-
Manhattan West Tower 2 is seeing rents today 35% higher than Tower 1 in 2019.
-
Despite recent news regarding Canary Wharf (e.g., credit rating downgrade, media articles indicating a large Financial Services firm may eventually leave Canary Wharf), BN said Financial Services firms now comprise 42% of Canary Wharf’s value, down from 60% in 2010 and BN’s plan for it to comprise 20% over time, driven by growth in Life Sciences, Retail and Multi-Family.
o US$6.7B is Core Retail (19 malls in the U.S.), which is currently generating +10% SS NOI growth; 97% leased; 41% LTV; and 6.2% discount rate. BN indicated Core Retail tenant sales per ft2 is +20% vs. pre-pandemic.
o US$7B in Transitional & Development is comprised of 180 properties, with a 51% LTV and 5-year average lease life.
o US$3B in Residential (US$2B in the U.S. and US$1B in Canada) comprise 83,000 lots in 20 markets. Last 12-month operating cash flow was US$510MM from 2,340 home sales and 2,330 lot sales, which drove a 14% ROE.
Insurance: (1) pro-forma the pending AEL and Argo acquisitions, this would increase Insurance’s assets to US$100B, which BN believes could generate US$2B in Distributable Earnings (DE) in the near-term and US$4-5B/year in 2030; (2) also pro- forma the pending AEL and Argo acquisitions, BN said run-rate annuity generation would be ~US$10-12B/year with existing capacity supporting US$20B/year; and (3) Insurance is currently generating 18-20% ROEs.
Be the first to comment on this post