Brookfield Says U.S. Home Rebound Just Begun
Brookfield Residential Properties Inc. (BRP), the second-best performing home-building stock in the Americas over the past year, said the recovery in U.S. housing is only just starting to add to earnings.
“We’re just at the beginning” of the recovery, Brookfield Chief Executive Officer Alan Norris said in a telephone interview from Calgary, where the company is based. “If you take a look at our numbers, all of our profit is from Canada. We’re only just starting to get to the point where the U.S. is going to be contributing.”
Shares of Brookfield, which is considering Phoenix and Las Vegas for expansion, surged 113 percent in the 12 months through Feb. 15, the second-best performance on the Bloomberg Americas Home Builders Index. The advance stands only behind Pultegroup Inc. (PHM), which posted a 125 percent gain. Brookfield Residential rose 1.2 percent to C$21.85 in Toronto today.
Homebuilding stocks have soared as low interest rates and an improving job market drive a housing recovery after a property collapse sent the index down 84 percent from 2005 to 2008. U.S. home prices rose 8.3 percent in December from a year earlier, the biggest jump since May 2006, Irvine, California-based CoreLogic Inc. said on Feb. 5. Existing home sales fell 1 percent to a 4.94 million annual rate in December as tight supply put a lid on deals, according to the National Association of Realtors, based in Chicago.
“You have a classic situation of demand building up from new entrants into the housing market, the banks starting to lend again, interest rates are very low, making houses available, and there’s no supply,” David Baskin, president of Baskin Financial Services Inc. in Toronto, which manages about C$440 million ($437 million), said in a telephone interview on Feb. 14. “So no surprise, new homes are being built again and prices are recovering in some of the depressed markets.”
Brookfield Residential invested in U.S. land during the housing downturn and now has almost 50,000 building lots in the U.S., making it the fifth-largest property developer in Canada and the U.S. The firm, which develops land and builds homes in 10 North American markets, including California and Edmonton, Alberta, is about 69 percent owned by Brookfield Asset Management Inc. (BAM/A), the Toronto based asset manager with a market value of C$23.3 billion.
While holding land through downturns requires “patient capital,” the company is now beginning to see the rewards, Norris said in the Feb. 14 interview.
“When land is moving and market cycle is good, it’s a very, very profitable business,” he said. “We kept telling people land is going to become a big issue as the recovery takes hold in the U.S. Now that has transpired and it’s exactly as we laid it out.”
Phoenix and Las Vegas are possible areas to expand the business because markets in those two cities “over-corrected,” Norris said.
The real estate developer on Feb. 13 said fourth-quarter net income more than doubled to C$56 million, helped by gains in both land and housing development, while revenue rose to C$715 million from C$365 million. The company does not break out Canadian and U.S. profit figures.
Brookfield said the average price of a single family lot sold in the fourth quarter rose 14 percent to C$159,000 from a year ago, helping revenue from its land business more than triple to C$407 million in the period. The company benefited from both higher prices and a greater number of transactions at its housing division.
Craig Sterling, managing director and head of global equity research with EVA Dimensions in New York, said Brookfield’s shares still have room to grow as profitability returns to the industry.
“If they execute properly, there’s probably another 50 percent in that stock,” he said in a phone interview on Feb. 15. “They seemed to have taken a bigger hit coming out of 2011 than most companies. They are starting to recover.”
The Canadian market will remain stable this year, said Norris. The challenge in the Canadian market is associated with high-rise development in Vancouver and Toronto, a segment the company doesn’t participate in, he said.
After years of rising sales and prices, Canada’s housing market has cooled. Home starts plunged 19 percent in January to the lowest level since the end of 2009, led by a slump in condominium construction.
“Our story is very much a play on Canada where we have a very strong and stable franchise and huge optionality in a U.S. recovery where we have half our assets,” Norris said. Brookfield Residential says one in five Calgary residents live in a Brookfield community.
Rising household formations, historically low interest rates, the favorable conditions of owning versus renting and low existing home inventories will all help boost U.S. demand for new home construction this year, Drew Reading, a Princeton, New Jersey-based Bloomberg Industries analyst who covers homebuilders, said by telephone on Feb. 15
“As a result of increased demand, homebuilders are aggressively increasing land spend, so they can replenish their lot supply amid faster community absorption rates,” he said.
Still, one of the main concerns about the durability of the housing recovery is the possibility of U.S. legislation that would increase the size of a required down payment on house purchases, Reading, said. Unemployment remains high and is impacting the speed of the recovery, he said.
“We haven’t seen first-time buyers get back into the market,” Reading said.
Brookfield is gradually shifting its mix of development to include more redevelopment within cities as municipalities in Canada in the U.S. focus on increasing density and slowing suburban growth, Norris said.
Brookfield in 1995 began developing MacKenzie Towne, a southeast Calgary “New Urbanist” community. Since then, the company has applied similar approaches to development in other cities in Canada and the U.S., said Norris.
While the company is well funded, Brookfield is “open” to working with sovereign wealth funds, Norris said. The company has no plans to expand beyond North America.
“We’re just at the start of a multi-year recovery in the U.S. housing market,” said Paul Diggle, a property economist at Capital Economics Ltd. in London, in an interview. “The U.S. market has fallen so far it looks cheap.”
The big opportunity is buying up large portfolios of cheap single family housing, Diggle said. “The inventory is starting to run down and we’re starting to see a slow recovery for land developers and builders,” he said.
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