2023-06-13 09:12:07 ET
Summary
- Bridge Investment Group Holdings Inc is a high-quality stock trading at a deep discount due to lingering fear and pessimism over the impact of monetary tightening on the real estate sector.
- BRDG's disciplined execution of strategies and recent developments should drive growth in assets under management, which has been underappreciated by the market.
- We initiate coverage of BRDG with a "Strong Buy" rating.
Lingering fear and pessimism over the impact of monetary tightening on the real estate sector means that it is still possible to find high-quality opportunities trading at deep discounts. While some of our favourite picks including D.R. Horton ( DHI ), SPDR S&P Homebuilders ETF ( XHB ), and Blackstone ( BX ), have performed exceptionally well since we initiated our bullish views, we continue to uncover compelling opportunities to add to our portfolio.
In this article, we highlight why we think Bridge Investment Group Holdings Inc ( BRDG ) could be our next big winner. We argue that BRDG may have been underappreciated by investors and that the collapse in its share price seems unwarranted. Management's disciplined execution of its strategies is sowing the seeds for strong returns in the next couple of years, and recent developments should help drive further growth in assets under management ((AUM)) in our view. We think these positive developments justify a re-rating of the stock. Accordingly, we initiate our coverage of BRDG with a Strong Buy rating.
Oversold On Weak Earnings Performance
Let's first discuss BRDG's latest earnings performance. According to figures from BRDG's Q1 2023 earnings presentation as well as comments from the earnings call transcripts, the main takeaway was that BRDG had reported a GAAP net operating loss of $67 million. The loss was mainly driven by an unrealized loss of $107 million related to accrued performance allocations and valuation reductions to selected real estate assets. Basic GAAP income per share for Q1 2023 was $0.03 with a loss of $0.13 on a diluted basis. BRDG moderately beat expectations on both revenue and earnings per share for the quarter.
It is also worth noting that BRDG has been slashing dividends, which we think is one of the main factors that led to the sell-off in the company's stock price.
At the time of writing, BRDG stock was trading at around $10.70, which is 58% below its intraday peak of $25.61 recorded back in December 2021.
We see little reason for such a deep discount on BRDG's stock. At its current price, the stock is trading at just 12.1x forward P/E and 10.6x TTM P/E. Even with dividends slashed, BRDG is giving investors a TTM dividend yield of 8.35%. We certainly see scope for a recovery in dividends going forward as the reduced dividend payouts were largely due to cyclical factors that should pass in the coming quarters.
Given that BRDG's real estate assets have already been mercilessly discounted in the current market environment, and we see no signs of distress at the company due to the high quality of BRDG's real estate portfolio, current valuations look extremely compelling in our view.
We also like that BRDG's stock has yet to play catch-up to the broader improvement in market sentiment that is driving impressive gains on the S&P 500 Index ( SP500 ). Adding BRDG to our portfolio should further add to alpha while we wait for it to play catch-up over the coming months.
AUM Growth To Drive Superior Earnings
Critically, BRDG is already witnessing a healthy recovery in AUM after surviving a wave of redemptions in 2022. We have previously highlighted this surge in redemptions across the private equity space that also impacted larger real estate funds including Blackstone's flagship Blackstone Real Estate Income Trust ("BREIT"). We are now beginning to see early signs of a broad-based recovery in AUM across the real estate private equity space. This recovery, however, appears to have been underappreciated by investors.
We maintain our view that this wave of redemptions will continue to subside as investors see increasing evidence that the current real estate market downturn is likely to be much milder than expected. Thus, it makes sense to us that investors will return to the real estate space in force. Moreover, given how well the broader equity market has performed this year versus BRDG, we do expect bargain hunters to start moving into some real estate plays.
We are also seeing more value in BRDG than ever before given that management has accumulated substantial dry powder worth $4.4 billion, giving BRDG the flexibility to pursue opportunities to deploy funds in the coming quarters. The current market remains favourable for BRDG due to depressed expectations and valuations on assets and we think BRDG is well-positioned to benefit from this environment. However, the superior returns that we expect from current deals are only likely to materialise over the course of the next 1 to 3 years. Therefore, we think this is an excellent entry point for medium-to-long-term investors looking for deep-value real estate plays.
We reiterate our core view that the current real estate market is built on more robust fundamentals compared to 2007. The U.S. housing shortage is the most important factor explaining why the real estate market has been so resilient thus far, except for commercial office property. With an increasing number of aspiring first-time homeowners being unable to afford the typical single-family home, the surge in demand for multi-family homes is likely to drive steady rent appreciation.
In Conclusion
BRDG is trading at just 12.1x forward P/E and 10.6x TTM P/E. Even with dividends slashed, BRDG is giving investors a TTM dividend yield of 8.35%. We see little reason in justifying such a deep discount on BRDG's stock.
We initiate our coverage of BRDG with a "Strong Buy" rating.
For further details see:
Bridge Investment: This Deeply Discounted Stock Could Be Our Next Big Winner