Billionaire Steve Mandel Playing Housing Rebound
Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Steve Mandel's Lone Pine Capital just disclosed that it owns a 5.1% stake in realty group Realogy (NYSE: RLGY). Realogy is the world's largest franchiser of residential real estate brokerages. The company franchises the brands Century 21, Coldwell Banker, ERA, Sotheby's International Realty, and Better Homes and Gardens.
The real estate franchise network has approximately 13,600 offices worldwide in more than 102 countries. Approximately 239,000 independent sales representatives work In these offices. Realogy also owns offices under the brands Coldwell Banker, Sotheby's International Realty, ERA, Corcoran Group and CitiHabitats.
Lone Pine Capital is describing its stake as a passive one. The ownership stake of approximately 7.5 million shares is a 207% increase from the first quarter of this year. Obviously, Mandel sees a housing recovery and he has identified a good way to play the rebound with the leading residential real estate broker.
As more and more homes are sold, commissions and revenue rise at the independent offices and flow back to the parent company. The franchise system is a good business model because overall costs are minimal. Realogy doesn't own land for building houses or have construction costs associated with building homes. Realogy is a pure bet on an increase in home sales and an increase in home prices.
Last year, Realogy had revenue of $4.7 billion. Of that, the gross profit was $1.0 billion. In the first quarter of this year, revenue increased 9% compared to last year and EBITDA was up 34%. This was a great quarter because typically it is the company's weakest quarter due to seasonality.
In the first quarter, the cancellation rate for transactions was only 9%, which was the lowest rate in more than 10 years. Buyers were reluctant to walk away afraid they may not find another house. Almost half of the company's transactions had multiple offers.
A problem for the industry is lack of inventory, though this will be alleviated in the coming quarters as long as home prices continue to increase. As home prices rise, homeowners that were previously underwater with their mortgages will now list their homes for sale. That will alleviate the inventory shortage and give brokerages like Realogy more listings and the chance to make more commissions.
The hedge fund trade
Besides Steve Mandel, there's several big names in the stock. The largest shareholder is billionaire Leon Black's Apollo Management with more than 86 million shares. Black acquired this stake when he did a leveraged buyout (LBO) of the company in 2007. He brought Realogy public last year at $27 per share.
After Leon Black, the second-largest holder in Realogy is John Paulson with 13.3 million shares, or a 9.1% stake. There's probably no better hedge fund manager in the world when it comes to housing than John Paulson. He famously spotted the sub-prime mortgage mess and is estimated to have personally made $15 billion in the housing collapse. He's now betting on a housing recovery, and with his track record, it doesn't pay to bet against him in housing.
The other two big names in Realogy are billionaires John Griffin and James Dinan. John Griffin's Blue Ridge Capital owns 5.2 million shares, and Dinan's York Capital owns 5.5 million shares. Both managers have said that they see a housing recovery on the horizon.
Other Foolish ways to play a housing rebound
Investors wanting additional exposure to housing can buy the home builders directly. Keep in mind that there is more risk involved with this approach because if housing starts to lag, the home builders are left with unsold homes and building lots. The advantage with Realogy is that its sales associates are independent and overhead is minimal.
In the home-building sector, my two favorite names are Lennar (NYSE: LEN) and PulteGroup (NYSE: PHM). Both housing plays are similarly favorites of Steve Eisman from Emrys Partners. He talked about both companies at the Ira Sohn Value Conference in New York this year.
Lennar sees growth continuing for the rest of the year. The company has 34% more homes on back-order than it did at this time last year - that's 4,055 more homes. To keep up with demand, Lennar spent more than $500 million on land to build new homes. When a home builder is buying land, that's a sign that demand is strong and that the home builder needs the additional land to satisfy deliveries.
In the first quarter of this year, Lennar opened 80 new communities and completed 55 communities. Currently, the company has 484 active communities. As a result of its land acquisition program, Lennar plans to have 550 active communities by the end of this year. To fund this expansion, Lennar has $1.1 billion in cash on hand and an available $525 million credit facility.
PulteGroup builds homes in approximately 55 different markets in the U.S. under the Centex, Pulte Homes, and Del Webb brands. PulteGroup is moving its corporate headquarters from Michigan to Atlanta to be closer to its customer base. Last year, home sales from northern Virginia to Florida represented 37% of its total business. In terms of year-end capital investment, this region represented 43% of the total budget.
By being in the southeast, PulteGroup's management can pay closer attention to its largest market. Last year, the Raleigh, N.C. market was the only market in the southeast that didn't grow net orders for new homes. Look for management to pay closer attention to Raleigh, N.C. and all of North Carolina.
PulteGroup has $1.7 billion in cash as it increases its land purchases this year and next. In the first quarter, the company invested $206 million in land purchases. The company ended the first quarter with 650 active communities compared to 753 last year. PulteGroup is closing out existing communities and is looking for new communities to expand.
I still see Realogy as the safest and best way to play a housing recovery. The company has minimal overhead and high margins. Increased home sales and prices lead to bigger commissions. If housing slows down again, the company's low overhead allows it to weather the storm much better than the home builders.
The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock it is in the brand-new free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.
Mark Yagalla has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!