May 07, 2012 - 2:18pm EST by
2012 2013
Price: 11.63 EPS $0.07 $0.07
Shares Out. (in M): 101 P/E NM NM
Market Cap (in $M): 11,786 P/FCF NA NA
Net Debt (in $M): 1,300 EBIT 163 163
TEV ($): 2,000 TEV/EBIT 15.3x 15.3x

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  • Rights Offering
  • Discount to book
  • real estate assets
  • Real estate developer
  • Discount to Liquidation Value


Brookfield Residential Properties Inc. is a stock for old-fashioned, patient, long-term, investors who can await value to out.

The company was formed about a year ago via a rights offering which enabled shareholders of Brookfield Office Properties to purchase shares of Brookfield Residential at a price of US$10 per share. 18,174,728 shares of Brookfield Residential were purchased by shareholders other than Brookfield Asset Management n the rights offering for $182 million. This represented 72% of the shares available for purchase by shareholders other than Brookfield Asset Management in the rights offering. Brookfield Asset Management purchased a total of 33,325,272 shares of Brookfield Residential in connection with the rights offering, representing its pro rata share, together with all shares of Brookfield Residential unsubscribed for in the rights offering by public shareholders. Upon completion of the rights offering, Brookfield Asset Management owned 74.5 million shares of Brookfield Residential, or 73.5% of BRP. Placing the Company In a Class With Others Is Not Simple -- There Are Issues First of all Bloomberg, and I suppose most investors, would place the company in the home building group .However, the company's principal business is not homebuilding but developing land for homebuilding. Although similar it really is actually a different business from that of building homes, and by the way the company does build some homes.

Second, there is the question of its nationality. Is the company an American company or is it a Canadian company? BRP is incorporated in Canada and has offices there but a principal office is at 3 World Financial Center in the financial district of  New York City.

The company's real estate holdings are spread around North America. For example in Canada, 43% of its land holdings are located in Alberta and 9% in Ontario where it has its principal Canadian office. In the U. S. 19% of its land is in California, 14% in Texas and 9% in Colorado.

Third, the company's business form is different; it is not a REIT as is typical of land companies. What's more BRP does not pay a dividend.

Fourth, a lot of folks, certainly most institutional investors, would consider BRP shares to be illiquid given the fact that Brookfield Asset Management owns 73% of them. However, since becoming public year ago, the daily trading volume has been just shy of 120,000 shares.

Fifth, and this is a good thing, for all the above reasons the stock is not likely to be placed in any ETF which cause transactions and indeed volatility for reasons other than a stock's economics

Finally it is no secret that homebuilders and related businesses are not enjoying the greatest of times, can be said to be depressed and the stocks unlikely to attract higher valuations for some time to come. BRP isn't as indicated really comparable to a typical homebuilders. But it is dependent on home building for land sales. And it is certainly not highly profitable. It earned 7 cents a share last year and we have no reason to estimate any different for this year so it has a large and meaningless three digit P/E. Thus there is no reason to think BRP will attract interest. In short it is not only out of favor but in disfavor. According to Bloomberg Professional there is no analyst coverage whatever of BRP. In fact for all of the above reasons lies the very reason the stock offers a tremendous opportunity for profit in the fullness of time. Indeed an opportunity on the order of magnitude well worth waiting for. Here is why.

Massive Undervaluation  Obviously neither the current P/E of 166 nor the price/book ratio of less than 1.2 suggests undervaluation. But consider what the company does. Basically, BRP's business is selling building lots. The company presently owns some 108,000 building lots. In 2011 the average sale price of a lot equivalent was $145,000 which compared with $175,000 in 2010. Market cap is $1.176 billion. Book value is $1.008 billion. Debt is $1.295 billion. Enterprise value is $2.503 billion. On the basis of the latter the building lots of be valued at approximately $23,000 each. If all of the building lots could be liquidated at $145,000 each the company would realize a gross value of $15.660 billion and net after debt $14.365 billion. This would equate to approximately $142 a share and compare with the $11.59 a share market price.

Certainly we do not expect the company to liquidate its land portfolio this year or next. In fact we would expect very little land to be sold in the next few years. This is true because the business is far below even what might be considered normal times let alone boom times. Neither can we make a forecast as to when or on what order of magnitude land sales will occur nor do we know with any degree of accuracy the prices that may be realized. What we do know is that one day BRP will trade on the basis of its properties at their fair market determined net asset value. At that time the company will sell a far larger number of home lots at prices logic dictates will be far greater than the prices realized on a handful of lots last year or even the year before. What we do know is that both book and market based NAV is going to rise and rise materially in the course of time. Value will out. Given patience it always does. There is absolutely no reason not to expect it to do so again and massively rewarded the patient long-term investor.





Excess supply of housing gets used up. Fullnes of time.
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