I have now deployed all the cash I raised from selling my Brookfield Property Partner shares (BPY or BPYU). What did I buy? See this table.
In my previous blog post, I showed a short list of prospective buys I was considering. See here. Out of that list, I chose not to add to my Blackstone (BX) position. Though it has done wonderfully well for me over the last three years (beyond my expectations, really), Blackstone’s valuation today gives me pause.
I also decided not to further invest in Blackstone Mortgage REIT (BXMT). It is a REIT that is owned and operated by its parent Blackstone. I had a stake built in it already and its shares are significantly off their 2020 lows.
Top of the table is Brookfield Asset Management (BAM), the parent company of BPY. Brookfield is one of my favorite long-term asset management company. I don’t have anything new to say about BAM here. It’s a great business and I add to my stake whenever it is trading at a reasonable price. You can see my profile of BAM here.
As I pointed out in my last blog post, BAM is taking over all of BPY, with some help from its institutional partners. BPY assets like its retail/office properties are quite valuable. The market is currently not placing a high value on them (thus enabling the parent to acquire them for cheap) but I have faith in those prime properties. I can’t keep my ownership stake post this merger. So it made sense that I instead just increase my BAM ownership as a way to keep my financial interest in them. This is what I chose to do with 40% of the BPY proceeds.
Some of the businesses that appear in the table may be new to readers. Specifically, I haven’t written about Rocket Companies (RKT), Oaktree Specialty Lending (OCSL), and Store Capital (STOR) before.
Rocket Companies (RKT): RKT IPOed last year. It is a founder-run long-term oriented operation that has excelled in residential mortgage business over the last twenty years. It is majority owned by its founder-chairman Dan Gilbert who’d not divested his stake in the IPO. Rocket today is the premier residential mortgage originator and servicer. Its most popular retail product is the well-known Quicken Loans. The stock market hasn’t given it due credit for being a FinTech business that has among the highest consumer brand recognition in the financial industry. So I have been happy to continue to build my stake in the business. BPY disposition came at a good time for me as RKT is still trading fairly cheaply in my view.
Our superior client experience is evidenced by our net promoter score (NPS) score of 74, a measure of consumer satisfaction, as compared to the average NPS of 16 for the mortgage origination industry according to J.D. Power.
S-1 Filing, Rocket Companies Inc., July 2020
Oaktree Specialty Lending (OCSL): It is a Business Development Company (BDC) that provides private credit to middle market businesses (revenue > $100MM). Like REITs, BDCs don’t have to pay corporate taxes on their earnings as long as they distribute 90% of it to the shareholders. There are many BDCs available to investors. What makes OCSL attractive to me is its ownership. As the name implies, it is run by Oaktree, the premier private credit asset manager in the world. Oaktree was co-founded in 1995 by Howard Marks, an industry veteran who I deeply admire for his investing acumen. See my previous note on Howard Marks here.
There is another connection between BPY and OCSL. Oaktree, OCSL’s parent asset manager, is partly owned by Brookfield (BAM). By swapping some of my BPY shares with OCSL, I am keeping those funds within the Brookfield family. Both Brookfield and Oaktree are highly trusted names in my book. I am happy to stay invested with these well-regarded asset managers.
Store Capital (STOR): STOR is a commercial REIT that invests in single-tenant, profit center, triple-net commercial real-estate properties. Triple-net leases are the kind where tenants pay all property costs including taxes, insurance, and maintenance. While there are many such triple-net REITs out there, STOR is a bit unique in that it focuses on profit-center properties where tenants conduct their businesses and generate revenue and profits. Their lease agreements also require tenants to share quarterly unit-level financials. STOR considers this subset asset class of net leases safer and more valuable. And I agree.
Like many of my favorite businesses, STOR is also a founder run company. Chris Volk founded the business in 2011 with seed capital from Oaktree (yet another connection to the esteemed asset manager). The company was IPOed in 2014. Since then, Oaktree has sold its entire stake, but Berkshire (BRK) now owns 10% of the company. Mr. Volk is now the executive chairman of the board, and he hasn’t sold any of his shares (what I can tell from SEC filings) except for tax and charity. STOR’s new CEO is also a company veteran and a co-founder of the business.
At the time I liquidated my BPY position, its dividend yield was about 9% on my cost basis. As you can see from the above table, I am not going to be able to replace that generous yield from these new holdings. Though I wasn’t chasing fat yields. If I were, I could have swapped out BPYU entirely with OCSL, given that OCSL is currently yielding 7.8%. My reasoning for taking only a 20% stake in OCSL is two-fold: One, it is a small-cap company with just $1.2B market cap. Two, it is a new business for me and even though I like what I’ve seen so far, BDCs are a new area and I like to take it slow and gradually develop a better understanding of the business model (and management) before I’d consider taking a bigger stake.
Of Dividends? As things stand today, my blended dividend yield of these new positions is only about 3%. But unlike BPY, I expect these companies to grow their dividends steadily every year (except for RKT that doesn’t pay any).
It’s worth pointing out here that RKT—even though a dividend non-payer today—has just paid a special one-time dividend in February of $1.11 per share. It came out to be about 6.6% effective yield at today’s share price. I expect more good news from RKT in future.
Finally, here’s the three-year history of these businesses. Taking dividends into account, they have all done better than BPY, except for Simon and Rocket. Rocket only has a one-year history so it’s an unfair comparison. Simon, on the other hand, clearly has underperformed but I like the business for its long-term potential. Brookfield (BAM) has returned an excellent 25% CAGR. Oaktree (OCSL) and Store (STOR) also did well during the last three years.
Looking ahead, these are all fundamentally strong businesses with multiple growth avenues ahead of them. They are obviously not fast growth technology mega-techs (I already have a fair share of those in my portfolio). Steady dividend and earnings growth is all I am expecting here.