When it comes to real estate investing, cash is king. Brookfield Property Partners (NASDAQ: BPY) has increased its dividend annually for eight years (each year since it became a stand-alone entity in 2013) and offers a huge 9.1% yield. Although that sounds compelling, there's a lot more investors must understand before jumping aboard. Here's an important primer on Brookfield Property Partners that will help you figure out if this well-run landlord is worth your time and effort.
A diversified portfolio
Many real estate investment trusts (REITs) focus on one or two types of properties. That isn't the approach Brookfield Property Partners takes. On its website, it explains it "owns, operates, and develops one of the largest portfolios of office, retail, multifamily, industrial, hospitality, triple net lease, self-storage, student housing, and manufactured housing assets."
That's a lot of territory to cover for one REIT. You could easily argue that diversification is a net benefit here, since Brookfield Property is basically a one-stop shop for people looking to own real estate. And with its eggs spread across so many different baskets, you wouldn't expect troubles in one property type to derail the company's overall performance. Both of these statements are generally true, but 2020 has not been a good or even typical year across a number of different property sectors. While the distribution has held up, the partnership is not currently covering the payment.
Specifically, Brookfield Property's relatively large mall and office portfolios have struggled. The only reason it's maintaining the payout is because management believes business will eventually get back to normal in a post-coronavirus world. This helps explain why the dividend yield is so high right now. And while it's nice to see the commitment to unitholders, Brookfield Property is something of a turnaround situation at the moment.
But, to be fair, Brookfield Property has long taken an opportunistic approach, buying when others are fearful. So it can be out of step with the broader market at times. Although the pandemic is an extreme situation, it may not be as far outside the box as it first seems. All in, more aggressive investors might still be interested here.
And now for the complexity
In fact, the real problem with Brookfield Property isn't what's happening to the business today. It's the fundamental structure of the entity. For starters, Brookfield Property is externally managed by Brookfield Asset Management (NYSE: BAM). With over 100 years of successful real asset investment experience under its belt, that's a pretty strong name to have as a parent. However, it sets up conflicts of interest some investors may prefer to avoid. Notably, Brookfield Asset Management can buy properties and not put them into Brookfield Property Partners.
Then there's the word "partnership." Brookfield Property Partners is not a REIT -- it's a master limited partnership (MLP). These are very different entities, with very different tax impacts to consider.
That said, realizing that some investors don't like to own, or in some cases can't own, MLPs, Brookfield Asset Management created a REIT share class called Brookfield Property REIT (NASDAQ: BPYU). It's basically just a different way to own the same company, but a REIT and an MLP under the same roof is a level of complexity that may not be worth the effort for conservative investors.
But that's not all. Brookfield Property owns a portfolio of office buildings and a portfolio of malls. The rest of its "portfolio" consists of investments in other partnerships run by Brookfield Asset Management. Brookfield Property doesn't own multifamily, industrial, hospitality, triple net lease, self-storage, student housing, and manufactured housing assets -- it owns stakes in partnerships that own those assets. This means it has limited control over what happens to those property portfolios.
You could just as easily buy your own portfolio of REITs that focus on these asset types and have a much better understanding of what you own and what's going on in the specific portfolios. Again, this level of complexity probably isn't worth the effort for more conservative types.
Not for everyone
Overall, Brookfield Property is really a well-run commercial landlord. And the fact it's putting unitholders first by maintaining the distribution through this turbulent time is a testament to its commitment to the long term.
However, it's not a simple investment to understand and, therefore, isn't appropriate for more conservative investors who like to take a hands-off approach to their portfolios. You really need to dig in here and keep a close eye on what's going on, or you might end up surprised by what you own at some point down the line.