This week has turned out to be Real Estate week. I think it has been more productive and profitable than my son's beloved Shark Week, and at least as much for me as the Bank Week series of columns I do from time to time. Although real estate has recovered from the crisis lows in 2009, the recovery has not been as strong as many might have hoped and there are still pockets of opportunity for long-term investors. The larger REITs and real estate companies have been pushed to high valuations by ETF and asset allocation buying, but the smaller companies are still very reasonably priced. Before we move on to other areas, I want to engage in one last round of real estate idea theft.
The folks at EJF Capital have proven themselves to be astute and successful investors in both small banks and real estate securities. They have a long track record, dating back to the day when the principals of the fund were running investment bank Friedman, Billings Ramsey in both sectors. They are very familiar with real estate and REIT markets, and I have done well stealing their ideas. Although we will most certainly revisit the firm's portfolio when 13Fs are filed next month, I want to take a look at its top three real estate holdings as of the end of the third quarter. I excluded any stocks where the firm had sold any shares and focused on those where it maintained or added to its stake in the quarter.
Its biggest stake is in shares of New Residential Investment (NRZ). This is an ultra-high yield REIT that invests in Excess Mortgage Servicing Rights, Servicer Advances, non-agency residential mortgage backed securities, and associated call rights. While the 17.5% yield may cause initial skepticism, it's worth noting the dividend was actually raised last quarter, so it doesn't appear management are projecting a cut in the payout any time soon. These are fairly complex instruments they are buying, so I don't know that I would back up the truck here, but the high yield, 15% discount to book value and a smart, sophisticated shareholder list that in addition to EJF includes Leon Cooperman, David Dreman, Citadel and Clinton Group lead me to think that owning a little in a real estate portfolio might be a good idea.
The second position is one that I think might be worth a more substantial look. Colony Starwood Homes (SFR) was created by the recent merger of Colony American Homes and Starwood Waypoint. The resulting company has a portfolio of more than 30,000 single-family rental homes in the United States. Co-Chairman Barry Sternlicht and Thomas J. Barrack, Jr., are both experienced real estate investors who have made a lot of money for themselves and their investors. The combined portfolio of 30,497 homes is 88% occupied right now, and the majority of these homes were purchased at much lower prices. That is not reflected in the share price right now. Merger presentation estimated a net asset value of $3.5 billion and the market cap is currently just around $808 million. This will give you some idea of the upside potential of this single-family home REIT. At the projected $0.88 a share dividend, the stock will yield a little over 4%, so we will get paid well while waiting for the full value of the portfolio to be recognized by the stock market.
The third largest real estate position at EJF Capital is Northstar Realty Europe (NRE). This REIT was spun out of Northstar Realty Finance (NRF) back in October, and owns office properties concentrated in Germany, the United Kingdom and France. Europe's commercial real estate markets are a couple of years behind the United States, but as the ECB continues to try to stimulate the economy with monetary policy, prices should continue to improve and NRE is a great way to participate in the future improvements in the market. Like many spin-offs, shares of Northstar Europe have fallen since becoming a stand-alone company and now trade below book value. The shares are yielding over 6% at the current price. The company also recently announced that its Board of Directors has authorized the repurchase of up to $100 million of its outstanding common stock. If you are looking for a way to profit from a long-term recovery in Europe, this could be the perfect vehicle.
EJF Capital and its principals have a long record of successful real estate investing. It just makes sense to steal their best ideas.