You really have to be careful when making the perceived value of a company's real estate holdings one of the main reasons that you buy a stock.
Sometimes, value investors can become overly excited about a company's real estate portfolio. It's an easy trap to fall into, and one I've been guilty of it myself.
For example, Sears (SHLD) seemed like a can't-miss opportunity a few years back. Many value investors were so taken by company's vast real estate portfolio (and CEO Eddie Lampert's leadership) that the stock became the focus of the day.
Calculations based on the value per square foot of Sears' real estate holdings seemed impressive. But that particular story never quite made sense to me, so I passed (thankfully).
Next up was J.C. Penney (JCP), which had a similar story -- a formidable real estate portfolio and then-new leadership under the legendary Ron Johnson, who became CEO in 2011. The value crowd was ecstatic, and I can't tell you how many presentations I sat through that heralded JCP's prospects.
Investors quickly pushed JCP up from $24 in August 2011 to $43 by February 2012. But I passed on this stock as well, as its potential seemed far too dependent on one man. Ultimately, that was a good call. Johnson lasted less than two years as CEO and Penney's shares now languish below $8.
By contrast, I did fall for a positive narrative from real estate firm St. Joe's (JOE). At one time, JOE owned more than 1 million acres of Florida land, including 400,000 acres within a mile of the Florida Panhandle's coastline. I began buying shares in 2002 and rode the stock upward. It seemed like a compelling opportunity -- until someone shined a light on some problems.
In this case, that light came from Greenlight Capital. In August 2007, Greenlight's David Einhorn responded to something I'd written about JOE, offering up his belief that the bulls were greatly overestimating the value of the company's land. Einhorn's arguments (which turned out to be spot on) didn't convince me at the time, but I ultimately lost faith in the company and sold.
Fortunately, I was out of the stock for quite a while when Einhorn made his famous case three years later for shorting JOE. I was at the 2010 New York Value Investing Congress when he spoke, and I still rank Einhorn's presentation as the best, most-thorough company analysis that I've ever seen.
On the other hand, real estate can sometimes be a nice peripheral holding for a stock, or an outgrowth of the company's main business. For instance, restaurant chain Cracker Barrel (CBRL) owns nearly two-thirds of its locations, making for a compelling real estate portfolio that gives the company good options for monetization.
I have CBRL exposure through a position in Biglari Holdings (BH), which owns 20% of the chain. My reason for owning BH doesn't primarily stem from Cracker Barrel's real estate holdings, but they're a nice sweetener.
The Bottom Line
I'm still enamored with real estate and probably always will be. But I've learned over the years to temper that enthusiasm and think about the many things that can go wrong.
I'm also mindful of that fact that while a real estate asset can look good on paper, it's meaningless unless a company has the ability to convert it into cash.