Fabrice Taylor, Chartered Financial Analyst, is a principal in Capital Ideas Research and writes the blog fabricetaylor.com
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The last time we looked at BPO Properties in this space, it was an $8 stock and I said it was a no-brainer, leaning heavily on some CIBC World Markets research.
That call worked out: With healthy dividends you're up more than 200 per cent in 15 months if you took the advice, although the stock did go to $6 within a couple of weeks of my tout before starting its flight.
BPO had some interesting news for investors late last week that, on the surface, might make you want to buy it: It's considering very seriously becoming a real estate investment trust. But for what it's worth I don't think it's that attractive any more. The parent company Brookfield Properties might be interesting though.
There was a time that pretty much any company could instantly add 20 per cent to its value by announcing that it was becoming an income trust. Those days seem long ago and far away. BPO's shares spent most of last Friday - the day after its announcement - under water.
I think liquidity is one factor. BPO trades by appointment. Almost 90 per cent of its shares are owned by parent company Brookfield (BPO is basically the Canadian subsidiary). Another issue might be valuation.
BPO is a crown jewel. It owns some of the finest office and commercial real estate in the country, including Bankers Hall in Calgary and First Canadian Place in Toronto. Its tenants are a landlord's dream. They're mostly big banks, insurers and other stable financial institutions, law firms and governments - organizations that all do well even in bad times.
BPO's occupancy stood at 98.6 per cent at the end of the year - not bad for a recession (The tenants are on leases, but they can break them. Few have, which is a testament to the reliability of the leases and the customers). BPO's net operating income actually rose on a same-property basis from the previous year. So it's a good business with good assets and the right clients.
But this seems well-priced into the company's value. For 2009, BPO earned net income of 66 cents a share. The stock is $20, which looks rich. It looks less rich if, as some do, you use funds from operations of $1.32 a share (FFO is a measure of cash flow). But let's just say it's not dirt cheap.
Of course a REIT conversion should make it cheaper, right? Once you cut your silent partner out of the loop - the tax man, that is - there's more money for shareholders, which is precisely how companies used to magically increase their market caps when they said they were becoming trusts. (That irrefutable evidence never stopped them from arguing that there was no tax loss to the tax coffers, but I don't want to digress.)
But even if you run a REIT scenario, BPO doesn't look great, stock-wise (As I said, it's a great company, but a great stock is a different story).
TD Newcrest estimates that as a REIT, BPO could distribute about 90 cents a unit this year. That translates into a 4.5-per-cent yield - not, I submit, a screaming buy even if it does come from one of the finest real estate portfolios in Canada.
What might be more interesting, though, is this scenario: A REIT conversion combined with the parent company selling down its position. It may be an opportune time for Brookfield to raise cash by selling off part of its stake in BPO to the public market, which might appease investors, who tend to prefer liquid stock. Brookfield would add to its $1.4-billion (U.S.) in liquidity, which it could deploy to buy distressed assets.
National Bank Financial offers a few reasons to like Brookfield Properties: First, it trades at a stiff discount to its peers - about 20 per cent - for reasons that don't look too daunting. Second, it gives investors exposure to the Manhattan market, which is volatile and might be at or near the bottom. About 40 per cent of profits are in the borough.
Third, the portfolio is of a quality that rivals BPO's. Brookfield's income also rose in the recession. Occupancy is 95 per cent and an appreciable number of leases are below market rate. Brookfield is also well run, with a good balance sheet.
In short, the U.S. company's stock isn't as mouth-watering as BPO was in November, 2008, but it might be more appetizing than its subsidiary today.