In the current environment, with interest rates rising and inflation still threatening the U.S. economy, it is hard to find many who are bullish on real estate. Momentum is very negative, and that will not change overnight.
However, when everyone hates a sector, as currently seems to be the case with real estate-related securities, it is time to start keeping your eyes out for special situations and unique, oversold opportunities that can have enormous upsides.
That’s exactly the kind of opportunity I have for you today…
Housing prices have been coming down, and publicly traded real estate investment trusts (REITs) have been heading south quicker than a hedge fund trader who is sick of paying state income taxes.
In the short term, I understand feeling broadly bearish on real estate. With mortgage rates back up above 7%, people are reconsidering their housing decisions.
Commercial real estate financing costs are also slowing in some markets. Offices are not even close to full occupancy in many major cities, and retail real estate has separated into the good, the bad, and the ugly.
Every sector of the REIT market is down in 2022. Even sectors with solid economics and outlooks, like multifamily housing, data centers, and industrial properties, have seen valuations plunge.
I keep track of institutional buying and insider trading daily. While I do not care even a little bit what Fidelity or BlackRock Inc. (BLK) are buying, a handful of activist investors, distressed investors, and deep-value investors function as a highly effective, free research service. If I see them buying large quantities of a stock or filing a 13D announcing intentions to take an activist approach, I will take a deeper dive. Often, the investment has massive potential and is worth adding to my portfolio.
In reading over the activist filings the week of Thanksgiving, I came across a very familiar firm, Angelo Gordon, that is taking an activist stake in one of my favorite real estate-related investments.
Angelo Gordon has deep roots in distressed debt investing. It was founded in 1998, a fantastic time to be in the distressed securities game. In 1993, Angelo Gordon began getting into the real estate business; since then, the firm has built a thriving investment practice in private equity real estate investing and real estate debt investing.
The day before Thanksgiving, Angelo Gordon snuck in a 13D filing stating the firm was flipping its 8.7% stake in Anywhere Real Estate Inc. (HOUS) from passive to active. The firm intends to talk to management, other equity holders, debt investors, and the firm’s lenders about a wide range of potential transactions to improve the company’s value.
One of the transactions Angelo Gordon wants to discuss is selling Anywhere Real Estate at a much higher price.
Anywhere is the leading real estate company in the United States. Its agents and franchisees were involved in over 1.5 million transactions in 2021, and by dollar volume, the firm is about 15% of the United States real estate brokerage market. It franchises the familiar real estate brand names Century 21, Coldwell Banker, Coldwell Banker Commercial, Corcoran, ERA, Sotheby’s International Realty, and Better Homes and Gardens Real Estate.
The company also operates real estate brokerages under the Coldwell Banker, Corcoran, and Sotheby’s International Realty names, and offers full-service title, escrow, and settlement services to help agents close deals.
While I understand that residential real estate sales may pause thanks to higher mortgage rates, I also know that we need between two and five million homes to meet pent-up housing demands.
The near future may look bumpy for Anywhere Real Estate, but the long term is fantastic for this company. The residential real estate market will recover, and when it does, Anywhere will prosper. Its stock should move back up to the old highs and possibly even beyond.
Even with rates rising, Anywhere Real Estate generated just short of $100 million of free cash flow in the third quarter of 2022 on revenues of $1.8 billion. However, thanks to a focus on managing expenses, the company cut costs by about $150 million year over year.
Anywhere is a very good business that is selling at a fire sale prices. The stock has a price-to-earnings ratio of 4, which is ridiculous for a company that dominates the marketplace like Anywhere does.
Given the widespread bearishness surrounding housing, it may be a bumpy ride for shareholders, but the outcome should be enormous gains for patient, aggressive investors.
Of course, profits could come sooner than expected if Angelo Gordon successfully pushes the company into a transaction, such as a sale, that would unlock shareholder value.
— Tim Melvin
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Source: Investors Alley