RE:RE:RE:RE:BPO.PR.I now in freefallSorry about formating, I highlighted interesting part below:
March 22, 2023
Brookfield Corporation “Real(ly)…Estate!?!” with Seth & Amy: BN’s share price implies zero value for Real Estate and 51% discount for non-Real Estate private investments
Our View: Our BN note is inspired by the Saturday Night Live Weekend Update skit “Really!?! With Seth & Amy”. We’ve been asked by investors recently what our thoughts are on BN’s 37% discount to NAV, as it's substantially wider-than-historical and hasn’t been this wide in over a decade. We think one reason is investor uncertainty regarding the value of BN’s Real Estate investments given higher interest/cap rates and pandemic effects (e.g., work-from-home). However, we think these concerns have existed for several quarters, yet even as recently as November 2022, BN’s discount to NAV was <10%, which makes the current 37% discount a bit perplexing. While we think these concerns are understandable, as we discuss below and in our note, we think it is being overly discounted in BN’s share price and view the shares as mispriced.
Key points:
BN’s shares are trading at a 37% discount to NAV…Really!?! Our NAV reflects a 30% discount to the IFRS fair value of BN’s Real Estate investments; otherwise, using IFRS fair value for BN’s Real Estate, the discount to NAV is 45%. Each 10pts change in our discount to BN’s Real Estate investments impacts our discount to NAV by just under 300bps (e.g., a 40% discount on BN’s Real Estate investments would have our 37% discount to NAV reduce to 34%). BN’s discount to NAV has not been this wide in over a decade and is substantially wider than its 5-year historical average of a 5% discount. To get to a 10% discount to NAV, this implies an ~US$42 share price or almost +45% upside in the stock.
The current share price implies: (1) zero value for BN’s Real Estate Investments…Really!?! From Exhibit 3, we show if you take BN’s current share price and back out more factual parts of the NAV (net debt, publiclytraded investments), this equals US$3.39/share, which implies the market’s valuation of BN’s private investments (Real Estate, Insurance). Given the IFRS fair value of BN’s Real Estate is US$19.56/share, one could view the current share price as implying both zero value for BN’s Real Estate and…
(2) implies a 51% discount for BN’s non-Real Estate private investments (e.g., Insurance)…Really!?! Assuming zero value for BN’s Real Estate, the US $3.39/share noted above implies the non-Real Estate private investments are being valued at a 51% discount to US$6.97/share IFRS fair value.