For those not familiar with it here is the original investment thesis for Brookfield Properties (BPO)
The report said (emphasis mine):
Dow Jones) TD raises Brookfield Properties (BPO) to hold from reduce, citing a “dramatic turnaround in freely useable liquidity.” Firm says the Canadian office giant recently raised $1B in an equity offering that improved its outlook dramatically. “With our liquidity concerns essentially gone, we no longer see reason for a material discounted relative valuation,” TD says. BPO up 1% at $1.38.
Relative valuation is the key here. The REIT industry is currently trading at a PE ratio of about 14 times earnings. Brookfield, at 6 times. What the report is saying is that Brookfield now should not have a “material discount” it now does to the industry. Simply put, the stock can rally 100% and still trade at a discount to its peers (barring any large earnings surprises).
We bought shares at $9.54 and will hold them as this is a class management team whose company is trading a a large discount to its true value…
Disclosure (“none” means no position):Long BPO, none
10 replies on “Brookfield Properties Analyst: "No Reason for Material Discount"”
So what range would you give BPO's intrinsic value? I'm assuming you're not putting at 14X and leaving it at that… curious if you're doing any more in-depth valuation…
Clear cut relative valuation play, so what do you think about a pair trade long BPO and short a REIT ETF like VNQ?
Best of luck. I missed that one (for a mock fund) because I got the jitters, and in some respects still have them. However, the company does have a lot of cash to snap up bargains. The only risk I can fret over is the possibility of they going buying too early, which would not be that much of a risk in the long term.
I'm once again faced with the same question I always seem to ask when I read these posts: what is Todd Sullivan's time horizon?
Todd and I had a conversation quite awhile back about time horizons and I believe the conclusion was that Todd was long-term as long as you define "long-term" as 1-3 years. The discussion we had revolved around the idea of measuring investment results over minimum five-year periods and I recall Todd submitting that five years feels like an eternity.
It was a great conversation overall and we respected one another's positions. However, I believe that if you are as convinced as I am that investment results are impossible to measure over 1-2 year horizons and that five years should be the minimum horizon, you should always consider Todd's goals are different than yours when reading his analyses.
If you're making a "relative valuation" play like this one, you must acknowledge that you are making a risky bet that a company's current multiple will change to reflect the average multiple experience by comparable businesses. This kind of bet requires you to have certainty that the average multiple of the comps (the target multiple) is fair and that the "bargain" business valuation reflects a reasonable average EPS for the business rather than one inflated by one time earnings windfalls.
I should also note that basing an investment thesis on the fact that an analyst says there is "no reason for a material discount" is fraught with circular logic. "I say so because he says so."
Charlie,
Have you read the first post? the one where i laid out the reasons for investing? it had nothing to do with a "relative valuation" play..
it had everything to do with a reit with stable earnings (rare in this environment), a great history and $1B of fresh capital to invest…
regarding time frame. it is what it is. we cannot predict earnings 5 years out. if you tried it in 2004 for 95% of the S&P you would have missed by a mile.
that being said, WHEN it becomes fully valued, i will look at selling. if operating performance continues that will not be long from now…
Then what was the point in this new post? Is this just unrelated evidence to confirm your original thesis?
Yes, I always provide updates or noteworthy news events pertaining to holdings as I come across them. The first sentence has the link to the original post on the investment thesis. This is just a followup
I see, so it's more about pointing to news that might help the investment work out, aside from the main catalysts described in your original investment thesis, right?
essentially, yes…