Shelter After The Storm
Samuel Lieber has a much rosier view of the real estate market than headlines of hurricanes, housing bubble, rising interest rates, and soaring energy prices would have you expect. Lieber manages Alpine U.S. Real Estate Equity Fund (EUEYX ), which has delivered an annualized return of over 20% during the past decade through its ownership of real estate-related companies and investment trusts (REITs). Personal Business Editor Lauren Young spoke to Lieber about investment opportunities in the sector.
Who will benefit most from the post-Katrina rebuilding effort?
The first beneficiaries are recreational-vehicle makers. When hurricanes hit Florida last year, the Federal Emergency Management Agency put 15,000 RVs in the region to give people shelter. Now the agency is talking about many, many more. Thor Industries (THO ) and Fleetwood Enterprises (FLE ) are two of the companies that are building RVs at lower price points.
The manufactured-home industry can really crank out homes, too. Some of the biggest players, including Champion Enterprises (CHB ), have restructured, shut factories, and paid down debt. Now, with rising demand, companies may have better pricing power. We have positions in Champion, Fleetwood (which also makes manufactured homes), and the more upscale Palm Harbor Homes (PHHM ). All of them have posted double-digit gains since the hurricane.
What about major homebuilders?
Our top holdings are the national chains, including Toll Brothers (TOL ), Pulte Homes, and KB Home (KBH ). Assuming we don't have a recession, they can provide earnings growth of 15% to 20% over the next couple of years. They have huge backlogs, strong balance sheets, and the ability to increase market share at a double-digit pace.
Will they get a big pop from the hurricane business?
Right now they don't have much exposure to the Gulf States. However, Lennar (LEN ), KB Home, D.R. Horton, and Pulte all have major operations nearby -- mostly in Texas -- which means they can set up shop in the Gulf pretty quickly. It makes sense to bring in three or four of these big builders that have the expertise and capacity to build thousands -- perhaps as many as 80,000 -- homes.
Nearly a third of your fund is in lodging stocks. What's your outlook there?
Two of our holdings are Hilton Hotels (HLT )and Starwood Hotels & Resorts (HOT ), which own and operate upscale hotels in densely populated markets. Business travel shouldn't be hurt much by higher energy costs, so these two chains should see big room-rate gains over the next few years. Incidentally, while most of the hotel chains in New Orleans are national, they have only about 2% to 5% exposure in terms of revenue loss. That has been more than offset by the exodus in the region -- hotels are booked everywhere.
What's your take on the housing market?
I'm not worried about a housing bubble. About 70% of American households own homes, and the Federal Reserve doesn't want to put the kibosh on that.
For most mortgage holders, higher interest rates should be manageable. Rates on 10-year bonds could go to 6.5% over the next two or three years. That may take steam out of the economy, but that's O.K. I do worry about short-term hybrid mortgages, though. With so many issued, there will be sticker shock for some consumers in three to four years. Last year we hit a record for subprime loans -- issuance reached $530 billion.
What about multifamily housing?
Some apartment REITs are seeing a short-term lift from Katrina, with occupancy rates in the Gulf rising by 4%. United Dominion Realty Trust is the biggest in the area. Camden Property Trust has many properties in Texas, and other players include Equity Residential and Aimco. Those higher occupancies should last only 6 to 12 months. Apartment REITs will continue to be limited by both cheap mortgages for single-family housing and modest income growth. I think these stocks are overpriced.