I am a huge proponent of discovering macroeconomic trends and
drilling down to find actionableinvestment ideas.
After identifying a trend, my next step is to look for
confirmation with the big-money players. Are hedge funds and other
institutionalmoney backing this trend with theirbullish bets? I
have found that when the big money confirms the start of a macro
trend, then there is explosiveprofit potential if I follow
And one of the most powerful macro trends of 2013 is well
Hedge funds have seized upon this trend to the point of it
becoming a major story in the financial media. This trend is the
confluence of the recovering housingmarket and the steady change
from a society based on homeownership to a "rentership"
And this is not just theory. The numbers are proving this trend
is already in progress. For example, research firm Zelman &
Associates has reported a 67% increase in single-family home
rentals in Florida, Arizona and Nevada between 2005 and 2011. This
includes a corresponding homeownership rate decrease to about 50%
in Nevada. While these numbers are extreme, they reflect what is
happening across our nation to differing degrees.
As the United States begins the shift into a "Renter Nation,"
home prices are rapidly rising in many regions of the country. San
Francisco and Phoenix have seen home prices jump 22% from their
lows, Las Vegas is up 11% and many cities in Florida has seen gains
of 8% to 10% during the past several years. Overall, U.S. housing
prices have climbed more than 5% since the bottom in October
These rising prices, although fantastic for existing homeowners
who were able to weather the financial crisis, act as a deterrent
to aspiring homeowners as prices spiral out of their economic
grasp. This is what's fuelling the changeover to a "Renter
Carla Pasternak, Chief Strategist ofInvesting , has been telling
her readers for months now that the housing recovery is one of the
"most dramatic turnarounds in U.S. history." And I am not the only
one who wholeheartedly agrees with her.
The big money is jumping on board, too.
Hedge funds have been purchasing single-family homes in large
block transactions and renting them out. Once the province of
individual investors and small companies, largefunds are now
getting into thelandlord business. In fact, my colleague Michael
Vodka recently wrote about
a little-known company that bought 16,000 homes
Clearly, this trend is creating opportunities for investors of
all sizes. And instead of investing directly into single-family
homes, which can become a difficult and time-consuming task,
investors should look intoreal estate investment trusts (REITs).
These types of companies provide investors with a steady income
stream from a diverse portfolio of properties they own and manage.
So in effect, investors act likelandlords , but with the advantage
of not having toput large amounts of money or spend too much time
on maintenance and administration.
Here are two REITs that are capitalizing on this trend.
1. Two HarborsInvestments (
This REIT owns agency and non-agency mortgage-backed securities, as
well as a strong portfolio of single-family homes. The company
boasts amarket cap of nearly $3.6 billion, a price-to-earnings (P/E
) ratio of 14 and an astoundingdividend yield of close to 18%.
Although a yield this high can be an ominous sign of a rough road
to come, I don't think that's the case with Two Harbors.
Cash flow has ramped up from -$11 million in 2009 to more than
$150 million expected in 2013. With a cash flow this high,
thedividend can be well supported. In addition, the quarterly
dividend was just increased, further cementing the investment
Along with the powerful yield, I really like the fact that Two
Harbors initiated a share buyback program in November, with
repurchasing up to 25 millionshares . This indicates the
management's firm belief in the REIT's future.
Technically, the company has been uptrending since mid-November.
Thestock price has rocketed from around $9 a share to its current
price of just more than $12 in the past two months. Although the
relative-strengthindex (RSI ) of 80 indicates the stock is severely
overbought, I think there is much moreupside to go. Remember,stocks
can remain overbought for a long time during powerful uptrends. My
12-month target for this REIT is $18.
2. Silver Bay Realty Trust (NYSE: SBY)
Two Harbors recently spun-off its single-family home portfolio in
December 2012 into Silver Bay Realty Trust. Two Harbors contributed
more than 2,200 single-family houses and $50 million incash in
exchange for nearly 18 million shares of Silver Bay. It's important
tonote there is a 90-day lock up on the shares. This means after 90
days, Two Harbors must decide to hold, sell or even distribute the
shares as aspecial dividend . Timewill tell, but I think the
decision will be beneficial to shareholders of both companies. [For
more on Silver Bay: "
The Easiest Way to Become a Landlord in 2013
Risks to Consider:
Not all hedge funds are buying single-family homes. In fact,
the $31 billionhedge fund Och-Ziff Capital Management Group is
looking to sell its portfolio of around 300 single-family homes.
Thefund was one of the first to see the opportunity last year and
is sitting on hefty profits from the investment. I think this is
simply a strategic decision triggered by unknown factors within the
fund, rather than a change in the macro picture. In addition, there
is the potential of rising real estate prices reversing, thus
causing losses for investors.
Action to Take -->
I like Two Harbors Investment and Silver Bay at present
prices. Two Harbors should be entered now with a target of $18
a share and stops at $11. Silver Bay has recently pulled into
the value "buy" zone and I have a $31, 12-month target with a $20
initial stop level.