U.S. home prices are warming up after a lengthy cold spell. The Canadian housing market? Well, I guess we’re debating what kind of “landing” we’re going to have.
So perhaps you could call investing in both, simultaneously, a form of diversification. And for that, we have Brookfield Residential Properties, a Calgary concern with significant operations on either side of the border.
Brookfield Residential Properties is an affiliate of Brookfield Asset Management, as can be inferred from the name. It debuted as a public company early in 2011, when Brookfield Homes Corp. combined with the residential land and housing division of Brookfield Office Properties Inc.
The company, which both builds homes and sells lots to other homebuilders, came to my attention over a year ago, after a laudatory article in the U.S. weekly Barron’s. I bought 100 shares on the New York Stock Exchange at $10.75 (U.S.) apiece and made a note to write about the company not too long after.
It was the first time I’d ever bought shares based on Barron’s recommendation, and it was nearly the last, as Brookfield Residential was trading below $7 six months later.
Since then, though, the stock’s price has more than doubled, as it has participated in the U.S. homebuilder runup. And yet, it remains reasonably priced by a number of measures, making it suitable for the Canadian investor who wants to bet on the U.S. housing rebound and also believes the domestic housing market will, at worst, see mild price declines.
The company had more than 100,000 lots in its inventory as of Sept. 30, with just over half in Canada. Of those, just over half are in its head office city of Calgary, with the rest in Edmonton and Toronto. Since Brookfield Residential focuses on single-family homes, it is “not exposed to the highrise market and the ‘pricing bubble’ that is currently impacting markets particularly in Toronto and Vancouver,” CEO Alan Norris wrote to shareholders in his third-quarter letter.
In the United States, Brookfield Residential has more than 21,000 lots in California, with most in the San Francisco, Los Angeles and San Diego markets (but some in more distressed areas, like Riverside.) The remainder – nearly 29,000 – are in Austin, Tex., Denver and Washington, markets that have avoided the worst of the U.S. housing crash.
While Brookfield Residential’s Canadian homes closely track the country’s average sale price of about $350,000 (Canadian), the company’s U.S. product is in a different bracket. The average selling price of a home in the United States in September was $292,400 (U.S.), Brookfield Residential says, but its 2012 sales to date have averaged $476,000 in California and $428,000 in its other markets.
Many of the things that enticed Barron’s in 2011 are still true: Brookfield Residential was profitable when U.S. homebuilders were not, and the company still trades at a discount to U.S. homebuilders according to the ratio of share price to tangible book value.
The company has no analyst following on streets Wall or Bay, perhaps contributing to a lack of awareness of its recent results or potential earnings power. Brookfield Residential’s 2011 revenue and profits were inflated by a change in business practice as to how it transferred titles to its lots. Then, it took a $140-million non-cash charge. That makes it difficult to compare 2012’s results to the prior year’s.
Brookfield Residential’s guidance, however, is for fourth-quarter income before taxes “similar to” the $189-million in the fourth quarter of 2011. My back-of-the-envelope calculation suggests that would put the company at about $1.35 in earnings per share for 2012. That would give it a price-to-earnings ratio of less than 12, also comparatively cheap among U.S. homebuilders.
You could say Brookfield Residential has bad luck: Just as U.S. home sales rebound, the Canadian market slumps. Instead, look at it as having the best of both worlds: When one country’s real estate industry slumps, the company can simply hold on to its inventory there and shift its focus to the markets where land is selling once again.
It’s like the proverbial man with one foot in a bucket of ice and the other in steaming hot water: On average, the temperature is just right.
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