A Seasoned Pro's Finance, Real Estate Picks

 | Aug 21, 2013 | 4:00 PM EDT
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It would appear that I owe readers an apology. Last week, as 13F filings were coming in fast and furious, showing the holdings of institutional investment managers, I set aside a couple of these reports with the intention of reviewing them later. These reports are from managers I respect enormously, and as proof of their all-around intelligence and stock-picking prowess, we often own many of the same stocks. As with everything else that gets set aside for later here at Chez Melvin, the reports fell into the black hole of Tim's desk. Today I will begin to fix that.

EJF Capital was started in 2005 by Emmanuel Friedman, one of the co-founders of Freidman Billings Ramsey, the broker-dealer and asset manager. The firm made a name for itself with its research and investment-banking success in the finance and real estate fields. Friedman partnered with the former head of Friedman Billings' alternative-investment and wealth-management divisions, Neal Wilson, to start EJF, and they have more than $4 billion under management.

The firm is doing some interesting stuff in both the banking and real estate fields. That of course is right in my wheelhouse, as I am a huge fan of both sectors when you can buy the securities cheap. EJF has been finding some opportunities that are cheap and appear to have significant long-term potential.

EJF has been a big buyer of little banks, and the second quarter of the year saw the buying streak continue. EJF opened new positions in Fidelity Southern (LION), Charter Financial (CHFN), VantageSouth Bancshares (VSB), NewBridge Bancorp (NBBC), Heritage Financial (HBOS) and ConnectOne Bancshares (CNOB), as well as a few much smaller banks. Of these listed here, only Charter trades below book value, as the rest have moved up in recent months. I continue to be big believer in the small-bank "trade of the decade," and it appears that Mr. Friedman also likes the sector.

The firm is also a big believer in the mortgage-servicing story, as it has large positions in leading servicers and added to several of them in the quarter. To my discredit, I totally missed this story and left a lot of money on the table the past few years. EJF holds shares of Nationstar Mortgage Holdings (NSM), PHH (PHH) and Ocwen Financial (OCN). EJF added to its Nationstar and PHH holdings in the quarter, and these are now its largest positions. At this year's Ira Sohn Conference, Steve Eisman gave a very bullish presentation of mortgage-servicing companies, and EJF appears to share his enthusiasm.

EJF bought a lot more of Colony Financial (CLNY) in the quarter as well. The hybrid REIT is involved in several segments of the real estate marketplace, as it has been buying troubled real-estate-related loans with an eye toward working them out at a profit. Colony has originated higher-yielding loans on properties such as hotels and offices. It has also invested heavily in a related company, Colony American Homes, which was created to invest in single-family homes and rent them. There are a lot of moving parts to this company, and I am going to have to spend a little time on it, but it is cheap at 90% of tangible book value right now.

EJF was also a big buyer of Silver Bay Real Estate (SBY) in the quarter. Silver Bay also owns and rents single family homes. It currently owns single-family properties in Arizona, California, Florida, Georgia, Nevada, North Carolina, Ohio and Texas. It currently has more than 3,400 homes for rent. Investors have not received the company well since its IPO, as the company has taken some time to get the homes rehabbed and rented, but it is now starting to see progress. The stock trades at 90% of tangible book and about 80% of management's estimate of current net asset value. I have been watching this one closely since the IPO and am going to pull the trigger on the stock very shortly.

Small banks, real estate financing and single-family homes all offer significant upside over the next decade. Tracking the holdings of investors such as EJF Capital that have been getting outstanding results in the sectors for decades is a good way to uncover ideas. These guys are now on my must-read list, and if you are a long-term investor, they should be on yours as well.

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