Steve Pei‘s $590 million Gratia Capital follows an interesting investment philosophy, which is marked by the fund’s fondness for the micro-cap real estate companies that head its public equity portfolio and include M/I Homes Inc (NYSE:MHO), Forestar Group Inc. (NYSE:FOR), and LGI Homes Inc (NASDAQ:LGIH). The market value of Gratia’s public equity portfolio stood at $272.89 million at the end of March, with the finance sector accounting for 53% of that value. A graduate from the University of Pennsylvania, Pei served as Vice President at Canyon Capital Advisors before he landed $25 billion in seed capital from Geoffrey Raynor’s Q Investments in 2012 to launch Gratia Capital. The value/event-driven hedge fund focuses on three major sectors: consumer discretionary, industrials and real estate. The fund currently has ten employees and two accounts. Gratia’s 74.42% turnover ratio for the first quarter was more towards the higher end.
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Gratia acquired some 387,100 shares of M/I Homes Inc (NYSE:MHO) during the first quarter to take the fund’s stake to 709,200 shares valued at $16.91 million. The fund’s largest stock holding represented 6.2% of its public equity portfolio value and constituted 2.29% of the $588 million builder of single family homes’ outstanding common stock. So far this year, M/I Homes Inc (NYSE:MHO)’s stock has appreciated by 5.31%. In its financial results for the first quarter, the real estate company beat both the top and bottom line estimates. The new contracts stood at 1,108, marking a 13% increase on a year-over-year basis, while the cancellation rate was down to 13%, a dip of 300 basis points, and gross margins improved to 21.7%, an increase of 170 basis points. Geoffrey Raynor‘s Scepter Holdings is the largest stockholder of M/I Homes Inc (NYSE:MHO) among the funds that we track, as it owns some 728,000 shares valued at $17.36 million.
During the first three months of the year, Gratia reduced its holding in Forestar Group Inc. (NYSE:FOR) by 9% to 780,300 shares valued at $12.31 million. The current stake represents 2.32% of the $452 million real estate and oil & gas company’s outstanding shares. Shares of Forestar Group Inc. (NYSE:FOR) have slumped by more than 12% year-to-date. In contrast, the general real estate industry is up by 7.71% during the same period. It is not just the low oil & gas prices that have weighed heavily on the company’s performance; earnings from the real estate segment during the first quarter stood at $9.1 million, down from $14.5 million at the end of the same quarter last year. The main reason for this was a decline in undeveloped land and residential lot sales. Within our database, Jeffrey Bronchick‘s Cove Street Capital is the largest stockholder of Forestar Group Inc. (NYSE:FOR), holding some 2.19 million shares valued at $34.46 million.
After an 8% boost in its stake in LGI Homes Inc (NASDAQ:LGIH) during the first quarter, Gratia held about 692,100 shares valued at $11.53 million of the $368 million homebuilding company operating in Texas, Arizona, Florida and Georgia. The holding represents nearly 3.5% of LGI Homes Inc (NASDAQ:LGIH)’s outstanding common stock. So far this year, the company’s stock has surged by almost 25%. The hedge fund interest in the company, among those that we track, has remained stable during the quarter as six firms had an aggregate investment of $30.84 million in LGI Homes at the end of March as compared to six funds with $25.24 million at the end of the previous quarter. Geoffrey Raynor’s Scepter Holdings is the largest stockholder among these firms, owning about 763,100 shares valued at $12.71 million.
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