If you have what I call a private equity mindset you tend to pay a lot of attention to what other similar investors are doing with their cash and portfolio.
If I see other deep value investors and private equity types kicking tires and buying assets in a particular sector or economic sector, I am going to shop around and see if I find any values in the space. On the flip side, if I see a lot of selling from private equity and other long term investors I am going to be a little concerned. When smart long-term holders are exiting a sector it may well be time to join them.
That's going on right now in real estate and real estate-related companies. Private equity groups are selling real estate with both hands right now. Blackstone has been one of the largest buyers of real estate the past decade and they have said they will be accelerating the pace of real estate sales in the next 18 months.
Other firms have been selling home builders, building supply companies and other real estate-related assets in the past few years. The IPO calendar is littered with real estate-related offerings as private equity and other long term holder's rush to ring the bell as pricing has improved this year.
Hotel properties seem to be a hot item to sell right now as Hilton, La Quinta and Extended Stay America are all said to be in the process of filing offerings to cash out their private equity owners.
Housing prices have come roaring back in some markets in the U.S. and some have rushed to announce a sustained housing recovery. I am something of a skeptic and wonder what is going to happen when all the institutional money stops flooding the market. With mortgage rates starting to rise we could see a lack of first time buyers in the housing markets which will make it very difficult for potential move up buyers.
I live in Central Florida and I see a lot of new construction activity and have to wonder who is going to buy those homes when funds and REITs stop snapping up lower priced home supplies.
At the end of 2011 homebuilders and building supply companies were among the worst performing industry groups and I wrote some bullish articles at that time. The companies were priced as though the no one would ever buy or fix up a home again and even the better capitalized builders were just too cheap.
Now, the builders and suppliers have doubled and even tripled in price and its time to exit the group if you didn't do so when I suggested it earlier this year. As far back as January I suggested that housing related stocks were a little too enthusiastically priced and apparently the smart money at large private equity firms are now in agreement. I see no reason to own these and certainly would not be a buyer of these stocks at current levels.
Back in 2009 I was an enthusiastic buyer of hotel REITs. They were priced as if we had entered a post-apocalyptic world and no one would ever travel again for any reason. We paid a fraction of book value for stocks like Sunstone Hotel (SHO), Diamondrock Hospitality (DRH), and Ashford Hospitality (AHT) and have done extraordinarily well. When I look at the hotel REITs and stocks right now, some of the smaller ones are worth holding as they trade at slight premiums to book. But I would be a seller of the big names like Starwood (HOT), Marriott (MAR) and Hyatt (H) at these levels.
I can't blame the private equity hotel owners for selling when the market is willing to pay more than 2x book and 20x earnings for hotel properties. I find it interesting that although many of the stocks trade at that level, few individual properties fetch those multiples of asset and earnings value in the private market right now.
There is a lot of smart long-term money looking to get out of real estate-related holding right now. It is time for investors to consider doing the same and to think twice before putting money into the sector at these levels.
Contrary to popular opinion, I am not a "buy and hold" investor. I am a "buy really cheap and hold until it works" investor. I bought a lot of real estate-related securities between 2008 and 2010. It worked. It is time to cash out and move on.