As a value investor who focuses on assets, I have always been fond of real-estate-related securities. The have a fairly dependable pattern of becoming deeply undervalued when the economy is sour and rising back to a full valuation when business conditions pick up.
This dynamic was exaggerated greatly by the credit and housing crisis that struck in late 2007. The market was practically giving property away in 2009, and I was a happy buyer. The first real estate stock I bought was W.P. Carey (WPC), the large commercial property manager, at a discount to the value of the property in late 2008. To say it worked out well is an understatement. I went on to add hitless real estate investment trusts, shopping centers, office buildings and even industrial property REITS over the next two years, and it has been one of my better moves over the years.
I still own them all. Property has recovered somewhat, but it is nowhere near the overvalued levels you might associate with a peaking market. Commercial real estate is a heavily segmented market, and some property managers are doing much better than others. Multifamily has been red hot for some time and probably will stay that way, as home ownership is at very low levels right now and probably will be for some time.
The real story in real estate is the big-small disconnect. The large REITS have seen massive inflows as asset-allocators and yield-chasers have pushed cash at them, driving the shares to what I consider unsustainable levels. They trade at very high multiples of book value, profits and cash flow and are not an attractive buy right now for long-term investors. The same can be said for the homebuilders, as a flurry of institutional buying of homes as long-term rentals creates an impression of a housing market that is not as robust as many seem to think.
However, there are still significant opportunities in real-estate-related securities. Those companies not in the major ETFs or indices have not performed as well, and some are still trading well below book value and could offer significant long-term returns.
I find it interesting that both of the offerings under the Brookfield banner that specialize in commercial and office buildings trade at a discount to tangible book value. While there are have been concerns about the debt level on one of the deals and about lease rates on another, I keep coming back to the fact they are very cheap, and I have never lost a dime in a deal put together by Brookfield Asset Management (BAM) as a long term investor.
Brookfield Property Partners (BPY) was spun out of BAM earlier this year, and the management company retained a significant ownership interest and stayed on as general partner. The property portfolio is global in scope and includes retail space, office properties, industrial real estate and even multifamily residential. It owns property in the U.S., Brazil, Canada, the U.K. and Australia right now. Some of the capital is invested through the parent company's funds, giving individuals access to deals that were previously available to only large institutional investors. The stock is trading at 75% of book value and yields a little over 5% at the current price. It is down about 12% since the spinoff, and I believe long-term buyers will be more than pleased with the returns from this portfolio over the next decade.
I have owned shares of Brookfield Office Properties (BPO) for a while now and would be willing to put new money to work in the name. The REIT owns significant portion of the skyline in some major U.S. cities such as New York and Boston as well as top-tier properties in Toronto and Calgary Canada. This portfolio is all class-A, top-tier office buildings that should appreciate substantially over the next seven to 10 years. The stock trades at just 70% of tangible book value and yields more than 3%.Investors' concerns about lease rates in its Lower Manhattan properties are overblown, and this is a chance to own premier properties and a discount price, in my opinion.
Investors have once again warmed up to many classes of the real estate market, and if you get away from the giant REITs and builders, there is still opportunity in owning real property via the securities market.