A Canadian Company with a Solid Foundation

 | Oct 11, 2013 | 5:00 PM EDT  | Comments
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bam

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bpo

I am writing this column from Toronto, and I have to say this is a vibrant city that seems to be doing economically very well. Just as I recently reported from Paris, Toronto's streets are filled with people, the restaurants and stores are bustling and the city looks clean and shiny.

One measure of the strength of Toronto's economy is its real estate market.

Colliers International just reported that the office market in the Greater Toronto Area reached a record low of 5.8%, down from 6.3% a year earlier. The downtown vacancy rate hit an all-time low of 3.9%, well below the 5.1% rate at the same time last year. By comparison, though New York is doing well, its vacancy rate is substantially higher than Toronto's -- 8.3% in September, according to Optimal Spaces.

Let me give you some personal observations. While Canadian mortgage lending practices are still somewhat conservative compared to the former practices in the United States, I was shocked to hear of some of the currently accepted practices -- combining a mortgage and home equity loan into one mortgage that is interest-only at a variable rate (currently about 3.5%), and 5% down loans (albeit with an extra 2% increase in interest rate for mortgage insurance). This has allowed prices to rise rapidly where the man in the street feels like they may be in a real estate bubble.

But it is commercial real estate that most attracted my attention. Brookfield seems to own almost every Toronto skyscraper I went into for meetings. And they were magnificent buildings. This got me looking at Brookfield, and if you want to diversify your portfolio into real estate, seriously consider making an investment in this company.

There are companies related to Brookfield, such as Brookfield Office Properties (BPO), but the one I want to focus on is Brookfield Asset Management (BAM), which owns 50% of Brookfield Office Properties. More than 100 years old, the company has about $175 billion in assets under management, including property, renewable power, infrastructure and private equity. Close to half the company's assets ($83 billion) are invested in property, including 315 office and retail properties totaling 280 million square feet. In addition to Toronto, the company has significant holdings in New York, Los Angeles, and other cities in the United States, Canada and Australia.

Other significant areas of investment include renewable power, infrastructure (transmission power lines, natural gas pipelines, timberlands) and private equity.

Not only am I impressed with Brookfield's properties, but my Peter Lynch-based strategy is, too. Years ago, I programmed the investment strategies of some of Wall Street's smartest players, including that of legendary mutual fund manager Peter Lynch. It is this strategy that thinks Brookfield is worth buying into. The primary variable used by my Lynch strategy is the price-to-earnings-to-growth ratio, P/E/G. It indicates how much an investor is paying for growth given today's stock price. The maximum P/E/G allowed is 1.0, and Brookfield's yield-adjusted P/E/G is 0.94. Also in the company's favor is a very strong equity-to-assets ratio of 18% (5% is the minimum required) and a solid return on assets of 3.06% (well above the 1% minimum required).

You do not have to visit Toronto to be impressed by Brookfield. As an investment opportunity, it is a solid performer from any vantage point. 

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