Rainwater, Banks and REITs

There is a quote from Richard Rainwater that has floated around the internet the past few weeks. Rainwater once said “Most people invest and then sit around worrying what the next blowup will be, I do the opposite. I wait for the blowup, then invest” and someone has tried to turn it into one of those internet memes that float around Facebook (FB) and Twitter (TWTR). It is a great quote and an even better investment approach but its advice almost no one is going to take. It is the same approach that Hetty Green and Andy Beal used to make fortunes and the reason Mr. Womack never lost money in the stock market but it will be good advice ignored. Most investors find it almost impossible to stay out of the market when it is rising and when it falls they will be too fearful to put whatever cash they have to work. It’s a shame because Rainwater was not only right he used his own advice to become a billionaire.

He liked to buy things that were hopelessly out of favor and undervalued where he could see a common sense way for conditions and valuations to improve. He bought financially strapped hospitals at bargain prices because he understood that combining them and using scale to reduce costs of supplies and services would turn them in profit machines. He bought Houston real estate in the 1990s when they were almost giving the stuff away and oil stocks later in the decade when the world appeared awash in black gold and crude traded in the teens. He formed a REIT in the 90s to buy distressed commercial real estate and sold it to Morgan Stanley in 2007.

Rainwater tried not to over think things. He said once that “If it takes spreadsheets and computer programs. You shouldn’t do it. If you can’t pencil it out in six lines on the back of an envelope, forget about it.” The opportunities he used to make his fortune were pretty clear cut and he moved aggressively to take advantage of them. He commented that “It’s not always easy. Sometimes people aren’t convinced. I always felt I was doing the right thing, but they didn’t, necessarily. I would sit there looking at these industries and realize that other people were seeing the same thing, but that they were frozen. People with the same level of knowledge and used to the industry, with chaos raining down on them, being crushed or frozen. After they had spent years being wrecked, they became despondent and didn’t want to leave the office. I would arrive with an idea and sometimes they didn’t want to do it or sometimes they would oppose it. But once I’ve determined what to do, I go forward. I fight despair with facts, and overcome greed by being generous.”

I spent a little time on the internet last night looking for old article on Mr. Rainwater. It becomes clear that he was practicing deep value investing with a private equity mindset and he used this approach to make billions of dollars. He bought cheap and the asset went lower he didn’t panic as along as he was convinced he was right. Barry Sternlicht of Starwood observed that “Richard would sit for years in a position that was under water and he didn't care. That was his style.” His first oil and gas bets went south for some time before rebounding a few years later and he made a fortune. It was clear to him that energy demand would continue to grow and he just waited until the rest of the world realized it as well.

If I use a Rainwater type obvious opportunity filter to look at the investment world right now we can come to a few commons sense conclusions. The firs tis that community banks are cheap and the consolidation trend presents a unique opportunity. Many banks are finding it increasingly difficult to remain independent as regulatory and technology costs rise. Many other banks need to grow to satisfy theirs shareholders and it is very difficult to drive growth in a slow growth economy. As a result they need to buy smaller banks to add assets and earnings growth. We will see more sellers if we get a Democratic administration again as the regulatory environment is likely to worsen. The best small banks can hope for under a Clinton presidency is that the regulatory climate just doesn’t get much worse. Buying small banks below book value where activists are shareholders is almost an arbitrage between current price to book and current average takeover premiums. It is an obvious opportunity.

My other observation is that single family real estate prices have risen quite a bit since the end of the credit crisis. The price of REITs that own single family homes have not followed suit. Clearly something has to give and I think it resolves with SFR REIT prices moving higher. We may see more takeover activity in the space as it is far cheaper to buy houses on the stock market than in the actual real estate market. We also see several CRE REITs that trade well below net asset value and several have attracted the attention of activists. These should also eventually be resolved by higher stock prices for the REITs.

Finally, a stock market at 22 times declining earnings is not a bargain and it’s a great time to build cash in anticipation of the next blow up, be it broad market or sector specific in nature. Fortunes are made by aggressively seizing opportunities in front of you like community bank stock and selected discounted REITs and patiently waiting for new ones to develop. Community banks, selected REITs and lots of cash is the best way to approach todays market. I suspect Mr. Rainwater might have agreed with me

Posted to Banking on Profit on Apr 28, 2016 — 12:04 PM
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