Rambling and real estate
Updated thoughts
This past year I have been focusing pretty intensely on the Swedish and Nordic real estate sector. Not exclusively, but the ongoing consolidation has retained my interest. I tend to get drawn in by situations which aren’t necessarily completely clean special situations where you can calculate a spread and take it to the bank. At the very least, there seems to me to be an open niche in situations with small defined upside or low downside but an additional undefined optionality on the upside. Those opportunities, I surmise, tend to fall between categories. Their upside is often too small and too boring for the long-only GARP investors and simultaneously too uncertain for the even-driven or arbitrageurs out there. It’s hard to describe it in more specific terms, as this moves the special situation framework into a more fuzzy arena and therefore introduces more of an in the eye of the beholder element. I like it because it neither seems to hold much attraction for the deep value special situation folks (you’re still my people though!) nor the long onlys. But that might just be my insufferable hipsterism shining through.
The more time goes by the more insistent I get that an investment should have a timeline and as clear and concise as possible of a catalyst. Ideally, it needs to be just one thing. Not an “if this, then that, then the third”. Here’s an area of improvement: don’t assume that something has to happen a certain way just because you think it’s logical. Evaluate the incentives objectively from each actor’s perspective and don’t just assume “economic rationality”, i.e. that shareholders will always be prioritized.
It can also of course be a general incentive structure where I’m unsure or even wrong about the exact steps, but will win if the general direction is accurate. Even this needs to work on a pretty definable timeline, though. I’m fine with landing in a genuinely long-term holding through the back-door, and hold a few of those, but at this point I’m pretty much over initiating vanilla longs just on the basis of “market overreaction” or something of the sort.
Obviously this is subject to revision if circumstances change — even now with the recent market swoon, those kinds of ideas might do better once again. In a generally optimistic market environment, just looking for ideas where the market is too negative seems to me like inviting the spectre of adverse selection. It’s just more likely that you have found your blind spot than that the market is completely wrong.
But as always, the market tends to make a fool out of you at the precise moment where you think you have spotted a pattern. After 14 years in this game of which 11 full time, I think I have at least learned to try and kill my darlings.
Obviously, the real estate plays have been working less well lately as rates have shot up on more hawkish central banker comments. Has this changed my outlook? Yes, absolutely, to some extent. I knew the risk of rates going in and bought them anyway. That might have been stupid or smart, who knows? We only get to live in one timeline. Obviously, my picks have had relatively crummy performance in the last few months, but my RE portfolio allocation has still outperformed the Swedish RE index significantly. So I might have done something right there. And the 2021 total performance was outstanding, so I shouldn’t complain too much.
Note that I won’t make any kind of habit out of doing follow-ups. Down that general road lies misery. If I can’t act freely, I can’t post anything ever. Because if posting inhibits my investing, then I have to give up the posting. If while I’m trading in or out of a stock, I also have to think about what exact reasons to give for it publicly, then the priorities are wrong. The game is to earn money, not to look the smartest. Writing is after all an afterthought. I don’t get anything from this except some self-amusement from crafting the posts. And the occasional Twitter DMs from smart dudes out there, which is a great perk. I love getting ideas or input from clever readers!
Anyway here goes, a few updates on the RE plays:
Corem
So I think that I have also publicly expressed that I thought Corem a bit stretched above 30. Not necessarily as a long-term play, but for the purposes of my thesis which is a consolidation play where Corem is the way to stay in closest alignment with Rutger Arnhult.
Being the poor trader that I am, I never completely exited Corem. It was my largest allocation from the spring of 2021 until late fall, but I kept 20-25% of it for somewhat irrational reasons and have thus given back some gains since. At 26 I like it well enough, but I’m not looking to add except maybe if I decide to nix some other sector play. They will likely increase NAV significantly for Q4 helped by some divestments above book. If the bond market stabilizes, the Castellum merger should be logical soon enough. Corem are also looking to list their residential assets, but it seems a bit delayed and the environment has cooled off a bit since. We will probably hear more about that in the Q4 report.
JM
I sold most of my shares above 400 and have sold off almost all the remaining shares in January and February. This is another case of not ideal trading, since I knew that my scenario was priced in above 400, when JM had moved up quickly and significantly but the other listed builders were trading flat. On the other hand, SBB itself was up so much that it was easy to see the allure of using the stock as payment for an even higher JM price.
The case weakened some with SBB not buying any shares in December.
As of this exact moment, with a rumbling bond market and a weakening SBB stock price, I don’t think a buyout of JM is quite possible and so the call option element has just about disappeared. Additionally, from here, I think residential is looking worse than commercial if inflation stays elevated.
JM is a stable company with a good, conservative capital allocation record, but the special situation is probably gone for now. There could be some moves towards a more aggressive setup of the balance sheet as Ilija Batljan takes control of the board. Also, Batljan has surprised everybody before. So, it’s certainly something to keep an eye on.
Castellum
I had assumed that Arnhult might buy more shares after the Q3 report — instead he sold some! I ruminated a lot on this but stayed completely put. A mistake looking back, obviously. I thought seriously about just hiding away it all in Entra, but to my detriment I am seldom that quick and decisive. It wasn’t the largest part of the thesis that Arnhult would keep buying stock, but it wasn’t exactly unimportant either and when he did the complete opposite, I should probably have taken more note.
Otherwise, this is probably the stock where the general dynamics has changed the least and now it’s down from ~250 to ~210. Obviously the macro matters a lot here too, but I stand by my original idea that when this story untangles, the extremely heavy discount to other owner-operators in the RE space doesn’t make sense. The market threw another tantrum when Arnhult fired his newly installed CEO and took the position for himself, but this changes absolutely nothing about the general outlook for the company. And the dividend is positively not at risk, as some seem to think. Might do buybacks after the Q4 report if a merger is not possible in the near term, as the balance sheet is extremely solid.
Entra
This is a tough one. Entra has outperformed the sector with only a very minor price drop. It doesn’t look like Balder is about to step above 40% imminently. The case for very large NAV increases has weakened somewhat, as appraisers might be less liberal in the uncertain rate environment. Rates in Norway are also considerably higher than Sweden’s with a central bank not as shy to raise them further. NAV increases might just matter less at this point, as the market could be looking even further out towards weaker NAV development later on.
On the other hand, the cash outlay to take out Entra for Balder and Castellum is not very big at this point and the Corem deal might be harder to achieve currently due to bond market considerations, potentially favouring a solution to Entra. Both suitors are however relatively comfortable in their seat right now. This situation is still relatively low downside, but the upside seems to have also decreased a bit in the immediate term.
In the Q4, which releases tomorrow February 11, it will be very interesting to see what they say about how they will run their balance sheet post-Areal.
So, to summarize, the cases have weakened somewhat across the board. I am bullish on commercial RE (office, logistics) relative to residential. We may have turned a corner where RE will be a tougher spot in the next few years due to tighter liquidity, but then again RE should do relatively OK with inflation. Those factors are however not things I want to primarily bet on. If consolidation grows to a halt due to macro, I should focus my attention elsewhere going forward, so I will be looking for further indications that way.
Im not into RE (pretty much ignored it becauce of the record low rates that can only head in the wrong direction - maybe not valid) but i read youre posts with high pleasure. And just like you mentioned i saw the upside abit to low to get blood taste enough to do the ground work. Allways thought i had atleast an equal good idea but with the advantage that i could hold on to it for a longer timeperiod to decrease the reinvestment risk. I´ve allways been thinking that i may pull of something like this if i worked my ass of as long as the market remains positive but i´ll probably loose more in short term plays than i would in my other investments when the shit hits the fan. Not as comfortable holding on to it, maybe not as high underlying resiliens as long picks, alternatives look more appeling etc - so to summarize, in my head it takes more work and probably larger losses in downmarkets, which makes it a sub strategy to my regular once. You write that you feel fine holding on to these long term as a back door so i asume you don´t make the same conclusion about large losses for whatever reason - not necessarily a universal right or wrong here, may be individual aswell.