A Real Estate Buy, Even for This Economy

 | Jun 19, 2014 | 3:00 PM EDT  | Comments
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I have made no secret of my skepticism about a housing rally this year, and I am doubtful that the global economic recovery is going to gain momentum anytime soon. I believe the drag from the Ukraine and Iraq is worse than we think at the moment, and there is always the potential for either of those situations to explode into something much worse. Nations around the globe are still struggling with high unemployment.

None of this spells a widespread rally for commercial real estate, as you really need jobs to lift markets such as office properties, industrial space and retail locations. Given all of this, you would think that I would be avoiding real-estate-related securities like the plague.

The opposite is actually the case. Two of my most recent purchases, Campus Crest Communities (CCG) and Preferred Apartments (APTS), are clearly real estate investments. No matter what grand macro scheme I have cooking in my fevered little brain, the value-investing discipline says to buy cheap stocks, and these are both cheap. Campus Crest trades at just 83% of book value, and Preferred Apartments is trading at less than 80% of book value, even after its recent 10% pop. They are cheap, and while I might not believe real estate will go up right now, it is pretty reasonable to assume that it will over the next decade, and both of these names pay generous dividends, so I get paid to wait.

I try not to play favorites in my portfolio of cheap stocks, but there are some I favor most. One such holding is Brookfield Property Partners (BPY). We acquired our stake when the company bought our shares of Brookfield Office Properties recently, and I like the company so much, I took stock instead of cash. There are two major factors driving my decision to take the stock in the deal instead of cash.

Fist, just as I have never lost money investing alongside Wilbur Ross, I have been in several Brookfield-backed companies over the years, and they have never lost me money. In fact, the opposite is the case. We still hold a few shares of Brookfield Infrastructure (BIP) that we bought (and recommended here) back in 2009. To say I am happy with those shares would be a gross understatement.

The other reason is that post-merger, this is one of the best collections of real estate in the world. Brookfield Property Partners has 154 office buildings, including big chunks of some major skyline like New York, Washington, D.C., and Los Angeles. Brookfield will also have an interest in 165 regional shopping malls and more than 20,000 apartment units. It has 58 million square feet of industrial properties and 68 million square feet of land for the development of future industrial properties. The company also has eight hotels that have 7,500 rooms. You get solid exposure to most segments of the real estate market.

It is globally diversified portfolio as well. While most of its properties are in North America, it also own properties in Brazil, Europe and Australia. Brookfield also has exposure to the Chinese market for industrial properties. Its relationship with Brookfield Asset Management gives it leadership with a solid operator with extensive global experience.

This is just a fantastic collection of assets, and it is available at a reasonable price. The stock trades at just 88% of book value at the current price. The shares yield 4.83%, and I would expect the payout to grow at a reasonable rate over time. This is a stock in which I would buy a position and then add in every bad stock market for the rest of my life or until it became so grossly overvalued that I would be forced to sell.

Although I am very skeptical about a strengthening economic recovery and a booming housing market in the near term, as a value investor I am aware that the macro doesn't pay the bills. Value does. Buying world-class assets at a discount and then holding for long periods of time is not an opportunity that comes around often, and Brookfield Property Partners is such an opportunity, in my opinion. I own it and am more than willing to buy more, should the markets ever actually go down again.

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