I have one more 13F filing to cover as we head into the weekend. I have been stealing ideas from EJF Capital for several years with favorable results and I see no reason to stop now.
In a bio for CEO Emanuel Friedman posted for a Milken Foundation event, the firm's approach was described as using "an event-driven approach to identify opportunities across the entire capital structure of companies, primarily focused in banking or related financials sectors that have been transformed by the regulatory environment." That's pretty much my core approach these days, so reading EJF's filings is just good business for me.
One of the first things I noticed is that they were buyers of mortgage insurers pretty much across the board. A recent Barron's article noted that prospects for the mortgage insurance industry were improving due to the long, slow recovery in housing and the very low loss rates being experienced for mortgage insurance at this stage of the housing cycle. Underwriting standards for mortgage insurance have tightened considerably since the credit crisis and losses are down to about 0.5% to 1%. EJF Capital was a buyer of MGIC Investment (MTG) , MBIA (MBI) , Assured Guaranty (AGO) , Radian (RDN) and Ambac Financial (AMBC) during the second quarter of the year.
Although not a pure bank fund, the firm is clearly a trade-of-the-decade participant as it owns a lot of community banks and added more this quarter. New buys include my old hometown favorite, Severn Bancorp (SVBI) , National Bank Holdings (NBHC) , Midland States Bancorp (MSBI) , Meta Financial (CASH) , Florida favorite Atlantic Coast Financial (ACFC) , First of Long Island (FLIC) , Sun Bancorp (SNBC) , Blue Hills Bancorp (BHBK) and Investors Bancorp (ISBC) . I also see EJF filed a 13G yesterday disclosing a 9.1% holding in one of my favorite little banks, Bay Bancorp (BYBK) in Columbia, Md. It also added to a couple of really small ones I can't mention here so it is worth your time to dig into the filing.
EJF was also buying both Northstar Realty Finance (NRF) and Northstar Asset Management (NSAM) . It also owns shares of Colony Capital (CLNY) , so it has all three pieces of the pending three-way merger among the firms. When the deal closes, the new firm will be a real estate powerhouse with $58 billion of assets under management and $162 billion of assets under advisory agreements. It will have $20 billion of real estate on the balance sheet as well including health care, industrial and hospitality properties and real estate debt holdings. The three firms have identified estimated annualized cost savings of $115 million and will be monetizing some assets to de-lever the balance sheet. I am a big fan of Colony and think the newly combined holdings will be a never-sell collection of real estate and real estate investment management operations.
EJF Capital also was buying other real estate securities, including Hudson Pacific Properties (HPP) , FelCor Lodging (FCH) and homebuilders Taylor Morrison (TMHC) and Toll Brothers (TOL) . Real estate continues to be a solid performer and although many real estate securities are getting a bit pricey, the firm is still finding some bargains in the space.
The 30,000-foot view of the portfolio shows the firm was doing quite a bit of selling in the quarter. Total equity holdings fell from about $1.5 billion to around $1 billion. Notable real estate-related sales include NexPoint Residential Trust (NXRT) , Starwood Property Trust (STWD) and City Office REIT (CIO) .
It also appears to be stepping out of the energy sector. EJF was a buyer late last year and in early 2016 and appears to be booking gains on many of the stocks purchased when oil was falling off a cliff. Energy sales include Marathon Oil (MRO) , Delek (DK) , Noble Energy (NBL) , ARC Logistics (ARCX) , Weatherford (WFT) and Nabors (NBR) . It still holds some energy names but is clearly cutting exposure to the oil and gas sector.
The firm also closed its put positions on the S&P 500 ETF (SPY) , the Russell 2000 ETF (IWM) and the Banking Spyder ETF (KBE) . I do find it interesting that it has lifted hedges on the sold equities and increased the cash position. This would lead me to believe EJF is pretty comfortable with what it still owns and does not feel the need to have the options hedges in place right now.
The folks at EJF Capital have proven themselves to be smart stock pickers. I will continue to raid their filings in search of investable ideas. You would be wise to as well.
