The 13F season is starting as the earlier filers get their reports in well ahead of the mid-month deadline. One of the earliest filers this time is a firm that has leapt up to near the top of my favorite reports to read each quarter.
EJF Capital was formed by Emmanuel Friedman and Neal Wilson who were previously at FBR Capital. They have some serious chops as stock pickers and did well for investors at FBR, particularly in financial stocks, during their years at the brokerage and investment banking firm. They bring a lot of experience in small banks, REITs and other sectors to the table and have made a name for themselves since opening the doors in 2005.
One of their funds was up almost 30% in 2012 as a result of figuring out how new legislation would cause banks to alter their capital structure. They saw that banks would buy back their trust preferred to comply with Dodd-Frank and other legislation that emerged post financial crisis.
I started paying attention to this firm when they began popping up in many of the small banks I follow and in which I own stock. In the latest filing they continue to show a strong belief in the Trade of the Decade, and added to many of their existing small bank positions and taking a new stake in several others.
Like my little banks, a lot of their picks are too small to mention here, but they did open new positions in some of the larger of the small banks. New banks in the EJF Portfolio include VantageSouth Bancorp (VSB), Omniamerican Bancorp (OABC), Independent Bancorp of Michigan (IBCP) and First Horizon National Corporation (FHN).
Small bank stocks have had a pretty good quarter. Do the homework on these shares to make sure they are still cheap enough to meet your investing guidelines.
EJF apparently has a high degree of confidence that Puerto Rico will recover from its current financial difficulties. They have bet that the banks will recover and eventually thrive as they bought shares on two of the biggest banks in the regions. They more than doubled their stake in Popular (BPOP) the Puerto Rican based bank. Although Popular is thought of as a Puerto Rican bank, they now have more offices on the mainland that they do in the islands. Credit conditions are improving for the bank and they just filed application to be allowed to repay TARP money to the Treasury. The stock is still cheap at less than 70% of tangible book value in spite of decent prices gains this year.
EJF was also a buyer of First Bank (FBP), the second largest bank in Puerto Rico. The bank has struggled with bad loans and nonperforming assets are still around 6% of total assets. This condition is improving, albeit slowly. The stock has been pressured by a recent sale by large shareholders including Oaktree Capital (OAK), private equity fund Thomas Lee and the federal government. It is important to note that Oaktree and Thomas Lee both still own around 20% each of the banks and one cannot blame them for taking partial profits on their shares. I have little doubt that they are expecting much higher returns off their remaining holdings of the bank's shares.
The fund also increased their holdings in real estate-related companies in the quarter. They almost doubled their stake in shares of Colony Financial (CLNY) to more than 3 million shares. The REIT is primarily in the commercial real estate fiancé business but they also have a substantial portfolio of single family rental homes bought at distressed prices during the real estate meltdown. The shares are cheap at less than 90% of book value and yield almost 7% at the current price.
EJF opened a position in New Residential Investment (NRZ) during the third quarter. This REIT specializes in owning excess mortgage servicing rights, nonperforming mortgage loans, mortgage-backed securities and other assets related to residential housing and consumer finance. There are a lot of moving parts to this one, but I am intrigued by the company and am adding it to my homework list.
They also added shares of one of my favorite real estate-related investments by buying more than 800,000 shares of Apollo Commercial Real Estate Finance (ARI) that also trades at less than 90% of book value and yields almost 10% right now.
As an asset-based value investor, I have a long standing love affair with real estate- related investments and small bank stocks. Apparently so do the principals of EJF Capital, and their filings have become a wonderful source of ideas for these investments. If they are not on your reading and research list, they should be.