In addition to valuations and what I see as a long, slow recovery in both residential and commercial real estate markets, the other thing attracting me to the real estate space right now is that activist investors are starting to show up in the space, and that's usually a good sign for future valuations.
I have done pretty well over the years with real estate-related investments that came under activist pressure and were eventually sold or liquidated at substantial profits from my cost. In recent months, I have noticed several filings in securities that I considered undervalued, and I take that as a very good sign.
I liked Campus Crest Communities (CCG) before the activists showed up. It was clear to me the student-housing REIT had some valuable properties, but management just was not executing very well. I was confident that eventually the value of the property would be recognized in the share price, and it seems I am not the only one who feels that way. Activist investor Clinton Group has paired up with student-housing manager Campus Evolution Villages to wage a battle for control of the company.
In their filing, the activists said, "The company has been without a permanent CEO for five months and there is virtually no student housing expertise at the board and executive level." They point out several mistakes current management has made, including the development program, and point out what they call egregious expenses authorized by the current board, including car leases and unrestricted use of a private plane for executives. Among the cars owned by the company for executive use are a Tesla (TSLA) and a Maserati. This seems excessive in light of the REIT's consistent underperformance.
Campus Crest shares are trading a little below book value at a time when other student and multifamily REITs are trading at a healthy premium. In addition, thanks to mismanagement and low occupancy rates, I suspect the properties are undervalued on the book. Even after the recent elimination, I think we will do well by waiting for the activists to gain control and unlock the value of the company.
Forestar Group (FOR) is a real estate development company that also has oil and gas as well as natural-resources interests. Activist funds SpringOwl Associates LLC and Cove Street Capital LLC have combined to push for changes at the company that will increase the value of the shares. In January, the activists sent a letter to the board that management at Forestar should consider strategic alternatives for all oil and gas investments and immediately halt all non-committed oil and gas spending. The activists so far have won two board seats and management has removed the shareholder rights provisions designed to thwart a takeover.
There is a lot of value in this company. It has a real estate development business that has several projects under way in the hot multifamily sector of the market and significant land holdings in Texas. Lot sales were up 24% last year and total earnings from this part of the business were up 40% year over year. According to the most recent earnings report, total gross profit from residential lot sales is up over 400% since 2010, and the company is seeing strong demand in the multifamily market. This is a great business that's being hidden by the drops in the oil and gas side of the company.
There is another potential gem in the form of the other natural-resources part of the company. Forestar's natural-resources segment includes sale of wood fiber and management of recreational leases, and approximately 1.5 million acres of groundwater resources, including a 45% nonparticipating royalty interest in groundwater produced or withdrawn for commercial purposes from approximately 1.4 million acres in Texas, Louisiana, Georgia and Alabama and about 20,000 acres of groundwater leases in central Texas. Groundwater resources could be extremely valuable in the future, especially in Texas, which has drought conditions in parts of the state.
Management has defended their record, pointing out that they have been buying back shares and have appointed the activists to the board to gain new perspectives. There a lot of possibilities here, including the sale of the oil and gas business or the sale of the whole company outright. Either development should be positive for current shareholders. At 78% of book value and a board more focused on shareholder value, the stock is a compelling purchase at current levels.
Activist involvement in undervalued stocks has made me a good deal of money over the years. I think some of the activist situations now occurring in real estate will do so going forward.
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