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The investing process is never easy. While many investors typically begin with the income statement to determine if an idea warrants further time, numerous investors choose to begin with the balance sheet and then proceed to the income statement to fill out the picture.
While the reason for staring with the income statement is more obvious, starting with the balance sheet can often lead to finding hidden value. By looking at a company’s assets, liabilities, and shareholder equity, we can determine if a company is growing in size and, most importantly if the total amount of equity (retained earnings) is increasing, decreasing, or remaining stable. In certain circumstances, it can also be very beneficial to look at the cash flow statement, but not in every circumstance.
Taking shares of Brookfield Canada Office Properties (TSX:BOX.UN) as an example, the balance sheet has grown over the past several years. From the end of fiscal 2013 to March 31, 2017, the total assets increased from $5.6 billion to almost $6.3 billion. Liabilities also increased from $4.75 billion (85% of assets) to almost $5.4 billion (86% of assets). Total shareholders equity increased from $855 million to $888 million. While this increase in equity is a good thing to see, there is much more we can learn from the number.
Given the number of shares outstanding, we can divide the shareholders equity by 26.43 million shares outstanding and arrive at a net asset value per share (NAVPS) of $33.60. Brookfield Canada Office Properties is currently trading at a price near $32.50, so investors have the opportunity to purchase shares worth more than what they are being traded for. To make this company more attractive, the assets are productive, meaning that additional monies are being generated and shared with investors along the way.
Brookfield Canada Office Properties currently pays a dividend of $0.11 per share per month, so investors will receive a dividend yield close to 4% with the potential for an increase down the road. As the company expands and purchases more productive assets, the opportunities for the additional funds generated to be returned to shareholders is very high. After all, profits can either be retained in the business (reinvested) or returned to shareholders. There are no other options available.
While Brookfield Canada Office Properties remains a much smaller outfit than the bigger Brookfield Asset Management Inc., the market capitalization remains close to $850 million, which is still considered a relatively large company in the real estate investment trust (REIT) sector.
In the REIT sector, investors may need to consider the balance sheet much more than the income statement; a majority of the value being obtained through the purchase of shares is received in the form of the real estate value. Although higher interest rates will act as a headwind to investors wanting to obtain increases in the underlying tangible book value (NAVPS), the reality remains that these productive assets are long term in nature. True long-term investors will prosper.
