Wesley Capital’s Top Real Estate Stock Picks for Q2

Wesley Capital Management is a New York-based long/short equity hedge fund that primarily invests in real estate securities. The fund was founded in 2001 by Arthur Wrubel, who has a B.S. in Economics from the Wharton School of the University of Pennsylvania, and currently manages assets worth nearly $115 million. Prior to founding Wesley Capital Management, Mr. Wrubel was a partner at Dickstein & Co., focusing on real estate and asset-backed securities. According to Wesley Capital Management’s latest 13F filing, its U.S equity portfolio was worth $93.88 million at the end of March and consisted of 18 positions. The filing also revealed that during the first quarter, the equity portfolio of the fund had a quarterly turnover rate of 100% and that its top-10 equity holdings at the end of that period amassed 94.57% of the value of its portfolio. Since the fund specializes investing in real estate stocks, we will discuss its top five stock picks from the sector as of March 31 in this article, which unsurprisingly, were also its top five equity holdings overall.

We track prominent investors and hedge funds because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012 (see the details here).

#5 Two Harbors Investment Corp (NYSE:TWO)

 – Shares held by Wesley Capital Management (as of March 31): 525,000

 – Value of Holding (as of March 31): $4.17 million

Wesley Capital Management lowered its holding in Two Harbors Investment Corp (NYSE:TWO) by 28% during the first quarter, making it the fifth-consecutive quarter in which the fund has reduced its stake in the company. Shares of Two Harbors Investment Corp (NYSE:TWO) were on a consistent decline between March of 2015 and this February, losing one-third of their value during that time. However, they are currently trading up marginally in 2016, owing largely to the spike they have seen since the real estate investment trust (REIT) came out with its first quarter financial numbers on March 5. While analysts had expected the REIT to report EPS of $0.20 on revenue of $100.10 million for the quarter, it declared EPS of $0.21 on revenue of $89.40 million. On March 15, the REIT reduced its quarterly dividend payment to $0.23 per share from $0.26 per share. Despite that cut in the dividend and the recent spike in the stock, Two Harbors Investment Corp still boasts an annual dividend yield of 11.14%. Michael Platt and William Reeves’ BlueCrest Capital Mgmt. initiated a stake in the company during the first quarter, purchasing 41,926 shares.

#4 Apollo Commercial Real Est. Finance Inc (NYSE:ARI)

 – Shares held by Wesley Capital Management (as of March 31): 505,000

 – Value of Holding (as of March 31): $8.23 million

Amid a 5.4% drop in Apollo Commercial Real Est. Finance Inc (NYSE:ARI)’s stock during the first quarter, Wesley Capital Management increased its stake in the company by 15%. On February 26, the REIT announced that it is buying Apollo Residential Mortgage (NYSE:AMTG) at $14.59 per share, which was 11% lower than the book value the latter had disclosed in its fourth quarter earnings report. Apollo Commercial recently reported its fourth quarter of fiscal year 2016 earnings, declaring EPS of $0.51 on revenue of $46.80 million, topping the EPS of $0.44 on revenue of $28.55 million that it earned a year earlier. The REIT currently pays a quarterly dividend of $0.46 per share, which translates into an annual dividend yield of 11.55%. With ownership of nearly 1.31 million shares of the REIT, Jim Simons‘ Renaissance Technologies was its largest shareholder at the end of 2015 among the funds that we track.

Wesley Capital’s top three real estate and overall stock picks are delved into on the next page.

#3 Colony Capital Inc (NYSE:CLNY)

 – Shares held by Wesley Capital Management (as of March 31): 565,000

 – Value of Holding (as of March 31): $9.47 million

Colony Capital Inc (NYSE:CLNY) is another stock in which Wesley Capital Management increased its stake during the first quarter, by 22%. Though the stock of Colony Capital Inc (NYSE:CLNY) has stabilized in the past few months after enduring a steady decline from April of 2015 through February, it is still trading down by 7.82% year-to-date. The massive decline that the stock has gone through in the last year has boosted its annual dividend yield to 9%. For the first quarter, analysts expect the company to report EPS of $0.50 on revenue of $200.40 million, while for the same quarter of the previous financial year it had reported EPS of $0.45 on revenue of $116.61 million. According to recent reports, Colony Capital is on the verge of acquiring NorthStar Asset Management (NYSE:NSAM). Murray Stahl‘s Horizon Asset Management inched up its stake in the company by 1% to 29,872 shares during the January-to-March period.

#2 Blackstone Mortgage Trust Inc (NYSE:BXMT)

 – Shares held by Wesley Capital Management (as of March 31): 1.00 million

 – Value of Holding (as of March 31): $27.10 million

Moving on, Wesley Capital Management reduced its stake in Blackstone Mortgage Trust Inc (NYSE:BXMT) by 12% during the first quarter. Unlike the stocks of most other REITs, Blackstone Mortgage Trust Inc (NYSE:BXMT)’s stock is trading in the green for the year, up by 4.80%. However, despite this rise, the stock still sports an attractive annual dividend yield of 8.79%. A few analysts who track both Blackstone Mortgage Trust and its parent Blackstone Group LP (NYSE:BX), feel that owing to the former’s higher dividend yield, lower valuation, and impressive balance sheet, it is a better stock to buy at current levels than the latter. Blackstone Mortgage Trust came out with its first quarter earnings on April 26, declaring EPS of $0.65 on revenue of $77.64 million largely in-line with the consensus estimates of EPS of $0.65 on revenue of $78.51 million. Following the earnings release, analysts at FBR & Co. reiterated their ‘Buy’ rating on the stock on April 28. Billionaire Ken Griffin‘s Citadel Investment Group reduced its stake in Blackstone Mortgage Trust by 58% to 598,819 shares during the first quarter.

#1 Starwood Property Trust, Inc. (NYSE:STWD)

 – Shares held by Wesley Capital Management (as of March 31): 1.50 million

 – Value of Holding (as of March 31): $28.49 million

Starwood Property Trust, Inc. (NYSE:STWD) continued to remain Wesley Capital Management’s largest equity holding at the end of March, despite the fund reducing its stake in the company by 5% during the first quarter. After trading above the $20 mark for nearly three years, Starwood Property Trust, Inc. (NYSE:STWD)’s stock fell below it early in 2016 and stayed there for much of the year. It has managed to recoup most of the losses it suffered at the beginning of the year since however and finally broke back above that $20 mark on May 9. Analysts who track the stock feel that it could deliver a lot of upside in the coming quarters as the Starwood Property Trust is among the few remaining companies that still services commercial mortgage-backed securities (CMBS) and is in a position to benefit from the present rising interest rate environment. The stock currently sports an average rating of ‘Buy’ and an average price target of $21.89 from the ten prominent analysts and brokerage houses that track it. Starwood Property Trust was another stock in which BlueCrest Capital Mgmt. initiated a stake during the first quarter, purchasing 13,759 shares of the company.

Disclosure: None