Published: July 1, 2010
Real estate was one of the hardest-hit sectors of the market
during the financial crisis, and for good reason. After all, the
real estate market caused all of this mess in the first place.
According to the Case-Shiller Home Price
Index, residential home prices have fallen about -30% from
their peak in 2006. Commercial real estate, the hardest hit
sector, has seen prices fall more than -40% since the 2007 peak
according to the Moody's/REAL Commercial Property Price Index.
Although prices have fallen off
a cliff, the declines appear have leveled off since late last
year. While prices could still make new lows, it's safe to say
the worst is over, making it a good time in the cycle to pick up
bargains in the right stocks.
Brookfield Properties Corp. (NYSE: BPO) is one of the
largest owners of commercial real estate in North America. This
Toronto-based company operates several landmark properties in
high-profile markets in the United States and Canada. The stock
has come a long way from under $5 a share during the peak of the
financial crisis, but it's still a long way from pre-crisis
levels. And here's thing: Although the stock price has been
hurt, the company's business and
cash flow really hasn't. The market should eventually
realize this aberration.
And while commercial real estate overall may continue to
experience problems, Brookfield seems to avoid the most common
For example, many properties are struggling with lower occupancy
rates as business failures and contractions have lessened
commercial space demand. However, Brookfield currently (at the
end of the first quarter) had an occupancy rate of 94.8%,
virtually unchanged from 95% in the year ago period and one of
the highest in the industry.
Also, lease renewal rates for many properties in the industry
have tended to be lower. Brookfield, however, maintains leases
that are on average -11% below current market prices. When
leases come up for renewal, Brookfield can actually raise the
rent. In fact, new leases rolled over in the first quarter were
at prices +25% higher than the old leases.
The company operates properties in some of the most prominent
and coveted locations on the continent. The one-of-a-kind and
high status nature of Brookfield's properties tend to attract
some of the best and most financially sound companies in their
industries, including companies like Royal Bank of Canada
(NYSE: RY), Goldman Sachs (NYSE: GS) and Chevron
(NYSE: CVX). These top notch clients create stable demand
and leads to steady cash flow for Brookfield.
First quarter results were not those of a company in a
struggling industry. Net
operating income rose +26% from the year ago quarter to $392
funds from operations (FFO) rose +30% to $136 million in the
same period. FFO from commercial property operations were up
+22% from last year's quarter because of same store sales growth
(more rent revenue from the same property) of +6.2%. Residential
development revenue soared +120% as the Canadian residential
market rebounded over the same period as well.
Looking forward, management said fundamentals in Brookfield's
markets are improving and that the company has turned the corner
from the financial crisis. In addition, the company has $1.7
billion available in cash and available credit lines to deploy
toward acquisitions. Although there are +29% more shares
outstanding than a year ago because of new share issuances in
2009, the purchase of properties at rock bottom prices should
have a positive effect on earnings in the near and long term.
Action to Take -->
Brookfield has a recession-resistant income steam and is in a
position to significantly boost it in the future by picking up
dirt cheap assets in the worst real estate market since the
Great Depression. As well, the company's assets and
inflation adjusted leases serve as an excellent
hedge against possible inflation going forward.
Brookfield has paid quarterly dividends of $0.14 a share since
2007. The stock yields a solid 3.8% based on recent prices. The
stock is well off its high of $30 hit in 2007 and should have a
lot of room to run in an improving real estate market.
-- Tom Hutchinson