Brookfield Property (NASDAQ: BPY) (NASDAQ: BPYU) knows a thing or two about value. As the real estate arm of well-respected value investor Brookfield Asset Management (NYSE: BAM), its management team's focus is finding mispriced real estate, acquiring properties and companies below their intrinsic value, and then patiently waiting for the right opportunity to sell them at a premium.
Right now, one of the best values it sees in the real estate market is its own stock. It highlighted this value proposition at its recent Investor Day. Here's why it believes the market has completely mispriced its stock.
Irreplaceable, highly valued assets
Brookfield Property's portfolio has three main components:
- Core office: 134 premier office properties in several major gateway cities around the world.
- Core retail: 122 best-in-class U.S. retail properties, mainly regional malls and urban shopping centers.
- Limited partnership (LP) investments: Sectors include office, retail, and alternative asset classes In Brookfield-managed real estate funds.
Brookfield Property has invested 43% of its capital in the office portfolio, 42% in the retail group, and 15% in the LP investments.
Despite all the turbulence in the office and retail markets this year due to COVID-19, Brookfield owns irreplaceable assets that remain highly valued due to their quality and location. Most of this value is in its biggest holdings, with its top 15 office complexes valued at $21 billion, while its top 25 performing malls are worth $15 billion. It has $10 billion of equity in those top office properties, representing the majority of its $13.5 billion of equity in its office portfolio. Similarly, it has an estimated $10 billion of equity in those top-tier malls, which is, likewise, a majority of its core retail portfolio's $13 billion equity value.
To put this value into perspective, Brookfield estimates the net asset value (NAV) of the core office portfolio is $13.40 per share and the retail portfolio is $12.90 per share. On top of that, there's a lot of embedded value in its LP investments, which it pegs at $4.80 per share. Subtract the corporate impact of debt at that level and other items, which it figures as a negative $4.10 per share, and Brookfield Property's NAV is $27.01 per share. That's substantially below its current trading price of more than $12.50 per share.
Putting its money on this view
Given the massive disconnect between the underlying value of its real estate and share price, Brookfield launched a $1 billion repurchase program in the summer of 2020. Funded at the Brookfield Asset Management level, the plan allowed existing investors to exit their position by directly tendering their shares to Brookfield at a premium to the market price. Overall, the company offered to buy nearly 74.2 million shares at $12 apiece. That allowed the asset management giant to scoop up high-quality real estate at a deep discount to its NAV and increase its stake in the company from 55% to 63%.
However, that program was only partially successful, as investors tendered about $500 million of their shares. This outcome suggests that despite the premium offered, most existing investors also hold Brookfield's view that the market has undervalued the company.
While the company couldn't buy back as many shares as it wanted via that direct repurchase program, it still wants to repurchase shares, given the discount to NAV. Because of that, it launched a different buyback program in mid-September to purchase shares on the open market. It can buy back up to 31.6 million shares, or about 10% of those currently trading on the public markets. This ongoing program will allow the company to steadily buy shares as they hit the open market.
Too cheap to ignore
Brookfield Property CEO Brian Kingman had one key message for listeners at its Investor Day: "Today, our shares trade at a significant discount to the underlying value of our real estate. And so, purchasing them at these prices provide investors with both an attractive yield as well as meaningful upside when we do ultimately recover."
Those aren't empty words, as the company backed them with sizable repurchase programs. Because of that, investors hunting for value should take a close look at Brookfield Property, which could be a big winner as the real estate market recovers.