As the Friday morning trading ended, the S&P 500 was down 1.1%. That puts it down nearly 3% on the week. The war in Israel has investors moving to risk-off assets. However, despite the bad week, the index remains up more than 10% on the year with less than three months left.
Scanning the unusual options activity for Friday, Brookfield Corp. (BN) has a put option that looks particularly enticing. It is the Toronto-based investment firm’s only option with a volume of more than 1.25x the open interest.
I’ve been a fan of CEO Bruce Flatt’s investment chops for years. Here are three other reasons I like the Canadian company.
Its Depressed Office Real Estate
It’s easy to understand why Brookfield’s shares are down nearly 3% on the year. Its Brookfield Property Partners (BPY) subsidiary, which it took private in 2021 for $5.9 billion on valuation concerns, has a diversified portfolio of real estate assets.
Unfortunately, part of its holdings include 131 office buildings with 73.7 million square feet of leasable space. The occupancy rate, according to the Financial Times, is 86.1%. Brookfield’s core real estate portfolio -- 16 office properties (five in New York) and 19 malls -- accounts for 40% of its owned office buildings and 20% of its retail properties. The occupancy for its core real estate as of June 30 was 95.7%.
FT points out that BPY defaulted on office properties in Los Angeles and Washington D.C. in 2023. The Times writes it has suspended payments on 3% of its $48 billion in secured debt.
According to the paper, Loomis Sayles analysts believe BPY’s shaky finances could lead to future defaults. However, ratings agency Standard & Poor’s believes Brookfield’s $850 billion in assets under management gives it plenty of negotiating power with banks regarding BPY’s $18 billion in secured debt maturing in 2024.
Flatt doesn’t seem worried about the situation.
“We have very little debt in BPY so it's not really relevant. We just had a rating on it and they’re negative on what's going on in the industry,” FT reported his comments on the situation.
If there’s anyone who can stickhandle BPY through a tough time in office real estate, it is Bruce Flatt.
Investors focusing on this segment need to see the forest for the trees. It’s got a lot of valuable assets. As some of its other assets become overvalued, it will sell and reinvest elsewhere. In the meantime, it will continue to manage the office situation as best it can until it improves.
That’s what long-term investors do.
Raises $12 Billion for Private Equity Fund
On October 3, Brookfield Asset Management (BAM), Brookfield’s asset-light alternative asset manager it spun off last December, announced that it raised 12 billion in total capital for Brookfield Capital Partners (BCP) VI, the largest private equity fund raised by Brookfield in its history. It has committed $3.5 billion of its capital to the fund.
“Our global deal pipeline remains robust during this current period of market dislocation, which is creating significant large-scale opportunities that suit our operationally intensive investment approach,” stated Anuj Ranjan, President of Brookfield’s Private Equity Group, in its press release.
To invest in a company like Brookfield, you must look at the entire picture. While the media continues to sound the alarms for its office portfolio, it’s got hundreds of billions going into situations where it has the upper hand because of its size. The fund has already found six businesses to acquire with $4 billion in capital from BCP VI.
Bloomberg reported on comments made by Cyrus Madon -- the CEO of Brookfield’s private equity group -- in early October when the capital was announced. He pointed out that it is finding technology and healthcare opportunities that are far more reasonable than over the past three years when valuations were much higher.
As Warren Buffet says, “Price is what you pay, value is what you get.”
Investors who focus on its office problems miss that it’s getting lower-priced deals with the same value, making them long-term winners.
The Unusually Active Option to Sell
The put option is the April 19/2024 $30 strike. As I write this, its share price is $30.84, with a bid price of $2.25. That’s an annualized yield of nearly 15% and a net price of $27.75 should the shares be put to you.
Brookfield Corp. used to be called Brookfield Asset Management. That name was taken by its alternative asset manager it spun off in December. Its shareholders got one new BAM share for every four in the old BAM.
BN stock traded around $35 at the spinoff. Add $7.62 for a quarter of a BAM share, and you’re looking at an actual price of $38.46.
So, you’ve got six months to see how this shakes out. I don’t see it falling into the mid-$20s, but you never know. I think it’s more likely that you will pocket $225 in income come April.
Long-term, whether you use options or not, Brookfield’s a keeper in my books.
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