REIT stocks have been falling lately as concerns about commercial real estate's fundamentals and valuations have surfaced. Some commercial markets are seeing prices and cap rates that leave me scratching my head, but below are some names that I like.
Brookfield Properties Partners (BPY)
One of commercial real estate's hottest segments involves central business districts. Many investors see office space in major cities' central business districts as liquid and safe, so they're willing to pay top dollar for it, according to well-respected commercial brokerage Colliers International.
But how would you like to get such exposure for 35% off of market prices?
Well, that's exactly what Brookfield Properties Partners currently offers. The company's latest quarterly report shows that BPY is selling for some 35% below management's calculation of net asset value.
Brookfield owns premier office properties New York, Washington, Houston, Los Angeles, San Francisco, Toronto, Calgary, Ottawa, London and the Australian cities of Sydney, Melbourne and Perth. Beyond office space, the firm also owns malls, multifamily projects, hotels and industrial real estate, plus land and buildings rented to some 300 auto dealerships on a triple-net basis.
Brookfield's ownership structure is a bit complicated, involving various partnerships and joint ventures. But buying the stock at current prices basically gives you a chance to own a global portfolio of top-tier real-estate holdings at a huge discount.
You also get emerging-market exposure, as BPY has been recently buying into Brazil's deeply depressed commercial markets. The stock also currently offers a 5.39% dividend yield, and the company is committed to consistently raising its quarterly payout.
Additionally, management is aware of the stock's current discount price relative to assets, so BPY has been buying back its own shares. In the fourth quarter, the firm repurchased 1,112,442 Limited Partnership units at a $22.39 average price.
Colony Capital (CLNY)
Last year's merger of Colony Capital and sister company Colony Financial created a real estate powerhouse run by Thomas Barrack Jr., who made a fortune in real estate since starting in the business some 25 years ago.
CLNY makes both debt and equity investments in real estate projects, and also owns an investment-management division.
The firm's great collection of assets includes light-industrial properties, which Colliers says is currently the U.S. market's most-attractive segment. Colony also holds a significant stake in Starwood Colony Homes (SFR), a REIT that owns more than 30,000 single-family rental homes.
Additionally, CLNY invests in other real estate equity, include triple-net-lease investments, real estate acquired through the settlement of loans, participating-preferred-equity investments and common equity in real estate companies. The firm's debt investments include approximately 96 first mortgages, mezzanine loans and preferred equity with $1.5 billion in total net book value. These loans have about a 10% average yield and about three years remaining to maturity.
CLNY has also purchased 1,800 performing and non-performing loans from insurance companies, commercial banks and the Federal Deposit Insurance Corp. The firm paid about 67% of face value for this $523 million portfolio.
Colony likewise paid just 56% of face value for 19 U.S. small-balance sub-performing-loan portfolios totaling approximately 8,400 loans that originally had $6.8 billion in unpaid principal. Lastly, CLNY's investment-management operation oversees about $9 billion of assets, earning the company management and incentive fees.
Still, Colony's shares have fallen some 18% so far year and currently trade at about 93% of book value. I did a back-of-the-envelope calculation and came up with a total value of about $25 per unit for the firm, which is well above CLNY's current price of around $16 a share. The stock also currently has a 10% dividend yield, so long-term investors should enjoy substantial total-return potential.
The Bottom Line
Commercial real estate certainly faces some areas of concern, but there's a massive disconnect right now between some REITs' share prices and the value of the real estate that they own.
So, I'm buying the above REITs with Warren Buffett's favorite holding period of "forever" in mind. Over time, I expect to be handsomely rewarded for doing so.
