A Contrarian Call on Real Estate

02/22/2010 11:30 am EST


Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

Carlton Delfeld, editor of Around the World with ChartwellETF.com, likes a commercial property developer with a diverse portfolio and a cheap stock.

With the widespread and palpable concern that commercial real estate is the next shoe to drop, it may seem an odd time to pick a leader in the commercial real estate business.

A contrarian pick it is—but with a stock price at around $13, Brookfield Properties (NYSE: BPO) has an edge on its competitors. Its focus on high-quality properties and tenants in major cities in America and Canada, strong cash flow, strong borrowing capacity and renewal rates, and reasonable valuation, with a nice 4.42% yield, offers investors a bit of a safety net.

Another major plus for Toronto-based Brookfield is that 25% of its square footage is in Canada—a market that has been less affected by financial turbulence since it has more conservatively run banks.

In my view, Brookfield will not only weather any storm but will emerge stronger as it picks up properties that just a short time ago would have been considered too expensive. The company [recently] reported a solid quarter and during 2009, Brookfield Properties leased 4.6 million square feet of space in its managed portfolio at an average net rent of $21 per square foot, a 24% improvement [over] the average expiring net rent of $17 per square foot.

In addition, the company improved its three-year lease rollover exposure since the start of the year. It has an average annual lease rollover over the next three years of just 4%, has an average lease duration of seven years, and finished the year with a managed portfolio occupancy rate of 95%.

Brookfield increased its corporate revolving credit facility to $438 million from $388 million since the beginning of the year, bringing total liquidity representing cash and cash equivalents and available credit to $2 billion.

On a relative valuation basis, Brookfield looks good compared with [its] peer group, though each company has different risk and property profiles. Jones Lang LaSalle (NYSE: JLL) and Vornado Realty Trust (NYSE: VNO) both had [losses] for 2009.

Boston Properties (NYSE: BXP) is perhaps the best match-up, though it trades at 35.8x [trailing 12 months] earnings and two times book [value], while Brookfield is at 5.7x earnings and 1.4x book, plus [it] has a higher return on equity.

The other positive is that despite a weak economy, the demand to acquire trophy properties in major cities appears strong with plenty of foreign capital interested in capitalizing on the current environment. A group led by Boston Properties, Goldman Sachs Group (NYSE: GS), Qatar, and Kuwait closed on the historic General Motors building in New York for $3.95 billion. The previous owner was the Macklowe family, which purchased the building for $1.4 billion in 2003 but was forced to sell.

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