Brookfield Real Assets

Brookfield Real Assets

Stock: RA

Rating: Good

Author: Waleed M. Tariq

Overview

  • Brookfield is reliable in offering a monthly income.
  • Historically the stock has been at a discount while it’s traded through in the recent past it’s at a high premium.
  • The moderately leveraged fund is likely to withstand the rising interest in the market.
  • As far as the stock is concerned I remain neutral considering the high premium, capital return, and the rising interest rate.

Bullish

  1. The company’s stock has gone down by 5.6% in the recent past and 2.7% YTD, this share price can be an entry point to CEF.
  2. Lower prices are an indicator of good valuation and attract potential investors
  3. The $0.199 dividend per share monthly policy provides an attractive 11.5% annual yield on price as well as a 12.8% yield on NAV.

Bearish

  1. The increasing rate of interest strains the firm’s net income.
  2. Investors may find it hard to invest in a rising return on capital.
  3. A bigger portion of the company’s distribution(71.54% in 20202 and 61.57% in 2021) was a return on capital which to them can be a tax advantage but translates to depletion of NAV threatening the future sustainability of the distribution.

Chart

The fund

  • RA being a closed-end fund invests in real assets. It has 37.8%,35.7% and 28.5% of its assets being equity based instrument, corporate credit and security credit respectively, distributed among other security in real estate CMBS and RMBS. It has 69% fixed rate securities and 31% floating rate.

Premium/Discount & Rising Interest Rates

  • Increase in interest rate was projected in post-pandemic recovery since 2021 which may have been the reason for the drastic change in Brookfield from discount to premium.  With the increase in interest rate expected to continue, the premium in RA’s NAV is expected to persist.

Brookfield is Adequately Leveraged

  • A higher leverage results to a higher yield, an increase in leverage from 30.21% to 50% resulted to a an increased yield on NAV by 35% and above though that meant a higher risk as shown below.
Potential effect on NAV in case of 10% Market Decline Unleveraged CEF Brookfield Real Assets High Leveraged CEF
NAV per share 18.67 18.67 18.67
Leverage 0 404,957,000 935,500,000
Total Assets 935,335,000 1,340,292,000 1,870,835,000
Leverage Ratio 0.00% 30.21% 50.00%
Total Assets after 10% Market Decline 841,801,500 1,206,262,800 1,683,751,500
Less: Leverage 0 404,957,000 935,500,000
NAV after Market Decline 841,801,500 801,305,800 748,251,500
Leverage after Decline 0% 50.53% 125%
NAV per share after decline 16.80 15.99 14.94
Net Decline in NAV per share 10.00% 14.33% 20.00%

Source: Author

  • In a bull market, high leveraged firms outperform lower leveraged ones and in a bear market underperform them. Brookfield has the potential to perform in both markets because its moderately leveraged at 30%.

Conclusion

  • Owing to the complexity of CEFs, investors should only venture in them after assessing the underlying portfolios. Depending on the investor’s degree of risk taking, one should only venture in CEF depending on its yield to risk ratio.