Black Friday deals lure U.S. shoppers, biggest sales gains online

NEW YORK (Reuters) – Shoppers across the United States snapped up deep discounts on toys, clothing and electronics both online and at stores on Black Friday, giving retailers a strong start to their make-or-break holiday season.

A healthy economy and rising wages gave people the confidence to splash out on retailers’ annual raft of bargains.

“The prices today are very good,” said Jose Manuel Cruz Hernandez, 59, who hit the Del Amo Fashion Center in Torrance, California, with his sister Paulina Cruz, 66, who comes every year from Mexico City to shop.

The pair spent $120 on princess dolls and other toys at the Walt Disney Co store, where items were 20 percent off. They spent a similar amount at Gap Inc, where items were discounted by about 55 percent.

Cruz Hernandez, a foreman at an aerospace firm, said he was comfortable with the U.S. economy and his own finances and plans to spend another $1,000 on holiday gifts – about the same as last year.

A similar story played out online, where shoppers spent $643 million by 10 a.m. ET, up 28 percent from a year ago, according to Adobe Analytics, which tracks transactions at most of the top U.S. online retailers. Smartphone sales in particular contributed to gains.

Foot traffic looked healthy at stores offering discounts, although detailed numbers on brick-and-mortar holiday sales will not be available for several days.

“Overall, Black Friday doesn’t have the sense of urgency as in the past and feels more like a busy regular weekend day in many of the stores,” said Dana Telsey at Telsey Advisory Group.

“Many of the promotions were available for the past couple of weeks,” Telsey said. “We haven’t noticed desperation from any retailer.”

Shares of Macy’s Inc, Kohl’s Corp, and Target Corp all closed down on Friday and weighed on the broader S&P 500 retailing index, which closed down 0.56 percent.

Investors are concerned retail sales growth may have peaked in the second quarter and business will slow down as comparisons get tougher, said Brian Yarbrough, retail analyst with Edward Jones.

Victoria’s Secret owner L Brands, Walmart Inc and American Eagle Outfitters rose. J.C. Penney Co Inc ended flat and Amazon.com Inc closed slightly lower.

The overall stock market finished a shortened session with losses.

STRONG ONLINE SALES

Early numbers showed overall retail sales, both in stores and online, were in line with expectations, according to Mastercard Inc’s SpendingPulse retail report. The firm expects overall Black Friday sales to top $23 billion this year, up from $21 billion last year.

Mastercard combines sales activity in its payments network with estimates of cash and other payment forms. It said cold weather in the eastern United States and wet weather in the west may be pushing more consumers online. 

Online spending is on track to hit $6.4 billion on Friday, Adobe said. Online sales on Thanksgiving Day were up 28 percent at $3.7 billion.

The National Retail Federation forecast U.S. holiday retail sales in November and December will increase between 4.3 and 4.8 percent over 2017 for a total of $717.45 billion to $720.89 billion. That compares with an average annual increase of 3.9 percent over the past five years.

About 38 percent of American consumers plan to shop on Black Friday, a Reuters/Ipsos poll showed last week.

People shop during the Black Friday sales shopping event at Roosevelt Field Mall in Garden City, New York, U.S., November 23, 2018. REUTERS/Shannon Stapleton

Very cold weather in the U.S. Northeast may have kept some shoppers at home, although industry analysts also reported added demand for coats and other warm clothing. An Athleta clothing store in Tysons, Virginia, provided hot chocolate with marshmallows to women in line for the dressing room.

DEAL FRENZY

Shoppers picked up big-ticket items such as TVs, Apple Inc iPads and Watches at Target, while phones, toys, gaming consoles and cookware were top sellers at Walmart Inc.

Many shoppers sought out air fryers, which do not use oil to deep fry food and Instant Pots. Kohl’s Chief Executive Michelle Gass told CNBC the company was selling 60 Instant Pots per minute online on Thanksgiving Day.

While most retailers have not changed their deals and discounts year-over-year, many have moved their start dates earlier and offered more teasers, according to deal site RetailMeNot.

The deepest discounts in apparel and accessories were offered by Michael Kors, which ran a 60 percent discount sale; Gap, which offered 50 percent off site-wide; and Nordstrom, which gave away up to 60 percent on merchandise.

Other deals included:

* An H&M store in Manhattan offered 30 percent off everything in-store and online.

* Macy’s in Herald Square, Manhattan, sold a Coach designer wallet, originally $225, for $53. Coach bags there, originally $259, were half off.

* Midtown Comics was taking 25 percent off everything at its three Manhattan locations until noon.

* An Eddie Bauer in Chicago offered 50 percent off all items.

* At a Chicago-area Pandora, which sells popular charm bracelets that can cost up to $1,000, jewelry was 35 percent off before 10 a.m. and 25 percent off for the remainder of the day.

* J Crew clothing was 50 percent off. Its site experienced some technical difficulties.

* Walmart was selling a Google Home mini for $99.

REPLACING A TOY STORE

Many retailers, reacting to the bankruptcy of the Toys ‘R’ Us chain, are catering to parents.

Target said in October it planned to dedicate nearly a quarter of a million square feet of new space to its toy business across 500 of its stores.

“Toys ‘R’ Us had better quality for toys,” said Ashley Drew, 29, shopping for her 5-year-old daughter at a Los Angeles-area Walmart, next door to the empty shell of a Toys ‘R’ Us store.

Department store JC Penney, known for its mid-priced apparel, has also made a push into toys.

Slideshow (13 Images)

Carolyn Pertette from Wilkinsburg, Pennsylvania, shopped in the early morning at the Waterfront Mall in Pittsburgh.

“I’m concerned about where I’m going to get toys,” she said.

Additional reporting by Shannon Stapleton in Long Island; Lewis Krauskopf, Melissa Fares, Jennifer Ablan and Anna Irrera in New York; Lisa Baertlein in Los Angeles; Richa Naidu in Chicago; Margaret Rice in Tysons, Virginia; and Siddharth Cavale in Bengaluru; Writing by Nick Zieminski; editing by Patrick Graham, Saumyadeb Chakrabarty and Bill Rigby

I Just Doubled Down On Brookfield Property Partners – 40% Discount To Fair Value With 7% Dividend Yield

This research report was jointly produced with Samuel Smith, co-author of High Yield Landlord.

Brookfield Property Partners (BPY) offers investors a unique opportunity to own world-class properties at a steep 40% discount to NAV alongside an attractive 7% dividend yield. Furthermore, its access to plentiful, low-cost capital and global markets – thanks to the vested interest of its parent Brookfield Asset Management (BAM) – gives it an attractive long-term growth profile. As a result, we are adding BPY to our core portfolio, giving our portfolio the added benefit of exposure to high quality office real estate.

Business Model

BPY was formed in 2013 as one of BAM’s limited partnerships. While this means it issues a K-1 (as a Bermuda-based LP) – a deal-breaker for some investors – there are two reasons that Brookfield Property appeals to those that typically reject such investments. First, BPY’s assets are also structured as limited partnerships. Therefore, it does not generate UBTI, making the units suitable for inclusion in a retirement account. Second, Brookfield recently started offering a REIT alternative, known as Brookfield Property REIT (BPR) to eliminate the K-1 if desired. They are both set to be economically equivalent and offer identical distributions/dividends both in terms of quantity and schedule.

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One of the biggest competitive advantages that BPY/BPR enjoys is that BAM owns 52% of BPY’s units and therefore, indirectly over 30% of BPR’s shares. With such a huge vested interest, BAM – as one of the world’s oldest, largest, and most successful real asset managers – provides BPY/BPR with access to a never-ending supply of lucrative deals through its enormous global network of business and government connections, strong management, and the security and cost of capital advantage that its enormous liquidity and A-rated balance sheet brings.

Alongside investments from its parent, BPY finances its investments by raising funds through selling debt and units in the public markets. It then uses these funds to buy equity stakes in various investment funds as well as individual assets fed to it through its Brookfield network. The vast majority of its focus is on high-quality office and retail (Class A malls and shopping centers) real estate, while it also invests in opportunistic diversification opportunities as they present themselves including multifamily, student housing, hospitality, self-storage, and industrial properties. Through acquiring quality assets at what it believes to be significant discounts in combination with its operational and value-add expertise, BPY aims to generate long-term returns of 12-15% while growing its distribution at a robust 5-8% annual rate. Management also enhances returns by routinely selling assets at rich valuations and recycling the capital at higher cap rates, which it can then apply its value-add/operational expertise too to unlock further value.

Another way in which management expects to drive superior returns over the long term is through its geographic and asset class diversification. By maintaining numerous options, BPY gives itself the ability to deploy capital at the greatest value, regardless of the market conditions in any one of its markets. It also tends to level overall operating results, similar to how a diversified stock portfolio experiences less volatility over time. Furthermore, management leverages its Brookfield connections in order to give it informational, operational, and bargaining advantages, enabling it to get superior values on its acquisitions and dispositions while also enhancing its value-add and deal flow operations.

Portfolio

BPY’s recent portfolio holdings include office, retail, multifamily, logistics, hospitality, self-storage, and student housing properties.

Office

BPY owns, develops, and manages 288 office properties totaling approximately 138 million square feet in premier cities in the major economic powerhouses of the world, including the U.S., Europe, Canada, Australia, Brazil, India, and South Korea. This global network works alongside the Brookfield connection to give them strong pricing power as a major landlord partner for some of the very safest investment grade tenants, including major international corporations and government agencies of top Western economies (i.e., U.S., Canada, U.K., and Germany). As a result, their office properties enjoy consistently strong occupancy and NOI growth (driven in part by ~10% long-term leasing spreads) and are, therefore, considered to be very safe relative to most other office REITs.

Some of their assets include:

Brookfield Place New York, U.S.

This state-of-the-art multipurpose property boasts a diverse tenant base including restaurant, retail, and office space. It experiences ongoing strong demand from businesses and customers alike as a premier live-work-play destination in Lower Manhattan.

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Canary Wharf, U.K.

BPY owns premier office and retail assets on the Canary Wharf estate in London through a joint venture, including ~7 million square feet of office space, over 800,000 square feet of retail space, and an office and residential development pipeline of over 3,000,000 square feet.

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Potsdamer Platz, Germany

As an iconic mixed-use complex in the center of historic Berlin, management is investing €100 million to unlock its full potential by renovating and repositioning the 3 million square feet estate as an attractive location for office, retail and residential tenants.

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IFC Seoul, South Korea

A 5.4-million-square-foot premier, mixed-use complex in Seoul, South Korea, consisting of three office buildings, a 400,000-square-foot mall, and a five-star Conrad hotel, this property gives Brookfield a strong presence in the heart of Seoul and the ability to attract and retain strong tenants.

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China Xintiandi, China

This property is a 4 million square feet, mixed-use complex in Shanghai’s central business district and Hongqiao transportation hub. The property’s owner partnered with Brookfield to leverage their expertise in completing some of the development and leasing the buildings. The partnership has already sold two towers at prices that outperformed initial projections.

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India Office Parks, India

A 10-million-square-foot, Class A office portfolio within India’s Special Economic Zones (“SEZ”) alongside a partially constructed, 6 million square feet development portfolio, Brookfield views this initial foray as laying the groundwork for significant expansion in the country’s marketplace.

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Canadian Office Fund, Canada

After acquiring two of Olympia & York’s publicly traded entities, Brookfield improved its presence in key markets by renovating in adding value to core properties in the 11 million square feet office portfolio. The non-core properties have since been sold off.

Manhattan West, U.S.

A 7 million square feet, mixed-use development at the gateway of the Hudson Yards District, it is one of New York’s largest and most state-of-the-art development projects. When completed, it will include three office towers, 844 apartments and 200,000 square feet of retail space, with strong appeal to the nearby business district as a premier work-live-play development.

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Trizec Properties, U.S.

This portfolio reflects a 2006 privatization of Trizec Properties, an office REIT with a presence in numerous major U.S. cities. Through the acquisition, Brookfield was able to unlock value in the portfolio by selling off non-core properties and leveraging their superior operating expertise and tenant network to grow NOI in the core properties.

Multifamily

As one of the largest owners and managers of residential apartment properties in the United States (over 25,000 multifamily units), Brookfield focuses on high growth markets and then leverages a fully integrated national multifamily services platform providing development, construction, renovation, asset and property management, and acquisition and disposition services. Brookfield also adds value through development work, with over 3 million square feet of property under various stages of construction in the U.S. and the U.K.

Associated Estates Realty Corporation, U.S.

After acquiring the company, Brookfield used its capital and expertise to grow the portfolio by ~13,000 units across 10 states while also renovating existing properties to add value.

Manhattan Multifamily, U.S.

A 4,000-unit portfolio in New York City, the property enjoys its prime location near Columbia University’s Manhattanville campus, the Second Avenue subway expansion, and Cornell University’s tech campus in Roosevelt Island. Brookfield has invested significantly in extensive renovations, technology upgrades, and a modernization of the energy systems, which have combined to yield a very attractive return on investment through rental growth and reduced costs.

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Retail

Brookfield has built a high-quality retail portfolio in the U.S., Europe, Brazil, and Asia. Some of their world-class assets include the famous Ala Moana Center (Honolulu), Fashion Show (Las Vegas), Tysons Galleria (Washington D.C.), Glendale Galleria (Los Angeles) and Water Tower Place (Chicago) as well as urban mixed-use retail districts in New York, Shanghai, London, and Berlin. With 100 of the top 500 malls in the U.S., these properties are far from dead and dying as they are landmarks, city centers, and tourist attractions, drawing from among the best tenants with strong pricing power ( high-teens leasing spreads over the past year, leading other industry peers). Furthermore, no single tenant accounts for even 4% of total rent and the average remaining lease term is ~6.5 years, giving them significant diversification and cash flow visibility.

GGP Inc., U.S.

The GGP acquisition gives Brookfield access to a large portfolio of solid retail real estate across the United States. BPY believes it can unlock considerable value by leveraging its business network, operational expertise, superior access to low-cost capital, and development acumen by repositioning and repurposing several of the properties with the long-term in view. It was willing to buy GGP shares at a premium because it believed it could drive long-term value from the properties in a way that GGP could not.

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Logistics

Brookfield owns ~34 million square feet of high-quality distribution facilities and continues to grow its portfolio as one of the nation’s largest logistics developers. The company uses its large network of warehouses and global tenant base to secure attractive long-term leases and high occupancy on its properties.

IDI Logistics, U.S.

Brookfield built this firm to serve as an owner, developer, and operator of warehouses and distribution facilities, selling its European business for a highly impressive IRR of 47% while continuing to own the U.S. business.

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Hospitality

Brookfield also owns and manages full-service hotels and leisure-style hospitality assets in high-barrier-to-entry markets across North America, the U.K., and Australia. The company pursues a strict value-add approach to these properties.

Center Parcs, U.K.

An operator of five short-break holiday destinations in the U.K. that generates stable, predictable cash flows. It enjoys a strong moat due to geographical and capital scale barriers to entry. Brookfield has capitalized on these strengths by investing heavily in growing the business.

The Diplomat Beach Resort, U.S.

As one of the few beachfront hotels with extensive conference facilities located between Miami and Fort Lauderdale, Brookfield has invested in renovating the resort and exploiting its unique positioning in the local market to carve out a niche moat.

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Atlantis Paradise Island, Bahamas

A 3,000-room beachfront resort with a convention center, casino, golf course, waterpark, and 65 acres of developable land, Brookfield has added value by renovating the casino, guestrooms, and improving its food and beverage offerings.

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Sheraton Centre Toronto Hotel, Canada

This asset possesses numerous competitive advantages that give it significant pricing power and strong demand: it is located directly across from City Hall, it is one of the largest institutional-quality, full-service convention hotels in downtown Toronto, and it is in a market with positive growth fundamentals and high barriers to entry. The hotel itself is highly impressive: 1,372 rooms, approximately 121K SF of newly renovated meeting space, with a direct connection to Toronto’s PATH network via 44,000 square feet of retail space on the concourse level of the PATH system and along Queen Street. Management envisions making the property even more elite by executing a comprehensive renovation plan, improving amenities, enhancing the arrival experience, and repositioning the retail space.

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Other

Additional assets in their portfolio include U.K. student housing portfolio (45 properties with over 16,000 beds), 136 manufactured housing communities in the U.S., over 300 triple-net lease auto dealership properties in North America; and numerous self-storage properties in the U.S. (some of which it recently sold for a 46% IRR).

Valuation

BPY appears undervalued based on numerous metrics. First, BPY’s current NAV (IFRS accounting) per unit valuation is ~$30, meaning that unit-holders have the opportunity to purchase equity in its high-quality and well-diversified portfolio at a 40% discount. Management reaffirmed its conviction in its steep discount during its most recent earnings call by discussing the possibility of beginning to buy back a massive amount of units in the coming quarters.

Second, it offers a substantially higher yield relative to other publicly-traded premier office and mall operators including Simon (SPG), Taubman (TCO), Regency (REG), and Boston (BXP):

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BPY Dividend Yield (TTM) data by YCharts

Furthermore, on top of its forward yield of ~7%, its plentiful access to low-cost capital and lucrative global deals through its sponsor combined with its value-add, operational, and pricing power competitive advantages give it a strong growth outlook. 2019 FFO projections put its current forward P/FFO multiple at a mere 9x. Its five-year average is over 10x and peers such as Simon trade at a P/FFO multiple of ~15x. Management forecasts that between organic, property-level NOI growth through value-add improvements and leasing spreads, development projects, profitable investment dispositions, and accretive acquisitions/unit buybacks, they should be able to grow FFO/unit (as well as distributions/unit) at a 5%-8% rate over the long term. However, given BPY’s recent large accretive investment in GGP, with a significant amount of additional projected accretive investment to be made in the GGP portfolio, management sees the upper end of that growth rate range being more accurate.

Even allowing for a significant margin of safety and assuming growth at the low-end of that guidance (5%-6% annual FFO/unit growth), BPY is still poised to deliver very healthy annualized returns of 11%-12% (according to the Gordon Growth valuation model). When considering the high-quality of the asset base and the deep resources of BPY’s parent, these returns are extremely attractive in a risk-adjusted context.

Risks

Given that the investment looks extremely attractive, why are units so cheap? First of all, many retail investors do not want to have to deal with the K-1 come tax time and BPR was just recently issued, so it may take a while for it to catch on with investors. Furthermore, the existence of the much larger publicly traded parent’s shares as well as numerous opportunistic investment funds within the Brookfield family provides significant competition for institutional dollars. Finally, as an LP, BPY units are not included in most real estate/REIT ETFs, mutual funds, and CEFs due to their focus on REITs. These factors combine to keep demand down for units, helping them to remain at a discount.

An additional factor tempering demand for units was the recent GGP acquisition. Due to the numerous uncertainties surrounding the details of the deal and the market’s general wariness of U.S. retail real estate, many investors preferred to steer clear. However, we believe that with the deal in the rear view mirror and the dust settling, investors will begin to overcome their initial reservations as they see the tremendous value proposition in these units. Already in just the past several weeks since the deal was completed, BPY’s units have been outperforming retail REIT peers.

The most significant risks in our mind stem from BPY’s high leverage as well as its exposure to international currency and geopolitical risks. Debt-to-EBITDA is ~13x, clearly a very elevated leverage level. However, there are five significant caveats that keep us highly optimistic about the safety of this investment.

  1. First, as previously mentioned A-rated parent BAM has an enormous amount of skin in the game here, and currently enjoys a record amount of liquidity. As a result, they will likely do everything in their power to ensure that BPY sustains its investment-grade credit rating (currently BBB) and enjoys the liquidity necessary to continue generating strong shareholder returns.
  2. Second, BPY’s portfolio is very high quality. Given its premier office and retail portfolios and diversification across geographies, tenants, and property sectors, cash-flows should remain quite steady over time, making servicing their debt very feasible. Should a recession occur, some of its portfolio (in particular some of the lower quality Class-A malls from the GGP portfolio) will likely experience declining occupancy and pricing power? However, management is planning to sell some of the non-core GGP properties and redevelop/significantly upgrade the others, thereby mitigating some of this risk.
  3. Third, BPY structures its debt in a highly conservative manner. 76% of its debt is non-recourse asset-level debt, meaning that its corporate-level debt is extremely low. It also means that if any of its properties underperform to the point of failing to service their share of the debt, they can simply give them to the lender and remove the burden from the rest of their portfolio.
  4. Fourth, management is dedicated to deleveraging, with an emphasis on paying down its already minor corporate debt. It forecasts bringing leverage down to 11x within the next year and a half primarily through debt pay-down and then further deleveraging over the long-term as development projects come online

Finally, geopolitical/macroeconomic risk is mitigated by the fact that most of the economies in which Brookfield operates continue to be strong/strengthening, liquidity remains plentiful (giving them ample time to deleverage), interest rates remain low (reducing the cost of carrying/refinancing a lot of debt) and the flattening yield curve portends low upside for further rate increases, leasing contracts typically have inflation increases built in to them, only 26% of assets are generating rent in foreign currencies, and BPY employs currency hedges to further reduce this exposure.

In summary, BPY – like all investments – is certainly not risk-free and we certainly would prefer to see them reduce their leverage by a considerable amount. However, we view that enough risk mitigation measures are being implemented to prevent this from being a deal breaker, especially when considering the significant value embedded in the units.

Bottom Line

BPY has one of the most enviable property portfolios in the world, with the financial, operational, and networking backing of the Brookfield family giving it plenty of options to continue growing and improving its portfolio. Despite these obvious advantages, units remain cheap due to competing investment alternatives and concerns about over-exposure to U.S. retail real estate and overleveraging as interest rates rise. However, given the risk mitigation techniques in place and the high-quality, diversified assets underpinning the partnership, we believe that BPY remains a fairly safe investment with very strong total return potential. Finally, its 7% distribution combined with its mid-to-high single digit annual growth potential make it a nice complement to our yield-focused portfolio.

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Disclosure: I am/we are long BPY (INDIRECTLY THROUGH BPR).

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.