Better Buy: Brookfield Infrastructure Partners L.P. vs. Brookfield Property Partners LP

By Markets Fool.com

Image source: Getty Images.

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Two of my favorite high-yield investments are Brookfield Infrastructure Partners (NYSE: BIP) and Brookfield Property Partners (NYSE: BPY). The former owns backbone infrastructure assets like pipelines, powerlines, and toll roads, while the latter owns iconic office buildings and premier retail locations. Those assets provide stable income streams backed by long-term contracted cash flows,enabling both companies to pay relatively high yields. Ideally, I would love to own more of both companies; however, like most investors I have a limited amount of capital to invest. Because of that, I thought I would compare the two and see which I should buy right now.

Comparing the income streams

Given that income is what I am seeking, it makes sense to start by looking at the income streams of both companies. Here's a table that shows how they stack up:

Company

Current Unit Price

Current Distribution Yield

Projected Organic FFO Growth Rate

Projected Distribution Growth Rate

Brookfield Property Partners

$23.50

4.78%

8% to 11% annually

5% to 8% annual distribution growth

Brookfield Infrastructure Partners

$50.00

4.72%

6% to 9% annually

11% to 13% near-term distribution growth contingent on acquisitions (or about 5% organically at the mid-point of FFO growth)

Data source: Company investor presentations. FFO = funds from operations.

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While the current yields of both companies are remarkably similar, Brookfield Infrastructure Partners offers stronger near-term distribution growth potential. That is due in large part to several acquisitions in the pipeline. The company recently closed investments in a portfolio of urban toll roads in Peru, a natural gas storage business in the U.S., and is about to close a transaction to invest in an Australian port and rail logistics company. Beyond that, it has two more deals a bit further down the pipeline, including being in exclusive discussions to acquire a stake in a natural gas transmission company in southern Brazil as well as having several investment opportunities to build transmission lines in Brazil. Because of the visible growth from these acquisitions, as well as its embedded organic growth, Brookfield recently raised its distribution by 3.5%. When combined with its 7.5% increase earlier in the year, that brought its payout up 11% this year. Looking ahead, the company noted that "should we continue to execute our current growth initiatives as anticipated, we believe that our next increase may be at the higher end of our annual distribution growth range" of 11% to 13%. That said, if those transactions fall through, distribution growth will not be quite so high.

Brookfield Property Partners, on the other hand, doesn't have the same visibility for near-term needle-moving acquisitions. That said, it is reshuffling its portfolio quite a bit and has already sold $1.5 billion of mature assets this year and reinvested that cash into other properties that have higher upside. These portfolio maneuvers, when combined with its organic growth potential via increased occupancy and rents, as well as the completion of its major development projects, should drive solid high-single-digit distribution growth over the long term.

How secure are the foundations?

Those projected growth rates are all well and good -- if they are achievable. To get a better handle on the likelihood either company will achieve its goals, we need to take a closer look at their financial foundations. Here's a snapshot of the numbers that matter:

Company

Credit Rating

Key Leverage Metric

Security of Cash Flows

Brookfield Infrastructure Partners

BBB+

Consolidated leverage 49%

90% of EBITDA is regulated or contracted, 70% indexed to inflation, 60% has no volume risk

Brookfield Property Partners

BBB

Targeting long-term debt-to-capital below 50%

92% of core office portfolio leased to average term of 8-plus years and 85% of its core retail portfolio leased

Data source: Company investor presentations.

The foundations of both companies consist of two key ingredients: Strong credit and stable cash flow. Both have low corporate leverage, solid investment-grade credit ratings, and are insulated by the fact that they predominately use non-recourse, asset-level debt to finance their business. Furthermore, fee-based contracts like leases or take-or-pay capacity contracts lock in more than 90% of cash flow, putting both on stable footing.

What about value?

Both companies firmly believe their unit prices are undervalued relative to their asset value. Brookfield Infrastructure Partners believes that its units should trade at a 4% to 4.5% yield simply based on its organic growth potential. As a result, it pegs its current value between $51 to $57 a unit, or about 8% undervalued at the midpoint. Meanwhile, Brookfield Property Partners' equity value in its underlying real estate assets alone is $30 per unit, implying that it is roughly 25% undervalued. Furthermore, the company believes it can grow its equity by 12% to 15% annually through a combination of earnings growth and appreciation.

Investor takeaway

Both companies offer remarkably similar current yields and financial foundations. The big difference is growth, with Brookfield Infrastructure Partners offering higher near-term distribution growth, while Brookfield Property Partners offers more upside through capital appreciation. For my money, the combination of solid income growth and strong capital appreciation potential offered by Brookfield Property Partners is just too hard to pass up. That's why I plan on bolstering my position in that company as soon our trading rules allow.

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Matt DiLallo owns shares of Brookfield Infrastructure Partners and Brookfield Property Partners. The Motley Fool recommends Brookfield Infrastructure Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.