Investors Alley

Last week a real estate investment trust (REIT) – which was not financially stressed – voluntarily “turned in the keys” for one of its properties, defaulting on a $725 million loan. The ramifications of this decision depend on a lot of factors.

Let’s talk about what it means for you.

On June 5, Park Hotels and Resorts (PK) announced it would stop payments on a $725 million, non-recourse CMBS loan secured by two of its San Francisco hotels. The hotels are the 1,921-room Hilton San Francisco Union Square and the 1,024-room Parc 55 San Francisco.

The press release made these comments:

After much thought and consideration, we believe it is in the best interest for Park’s stockholders to materially reduce our current exposure to the San Francisco market. Now more than ever, we believe San Francisco’s path to recovery remains clouded and elongated by major challenges—both old and new: record high office vacancy; concerns over street conditions; lower return to office than peer cities; and a weaker than expected citywide convention calendar through 2027 that will negatively impact business and leisure demand and will likely significantly reduce compression in the city for the foreseeable future. Unfortunately, the continued burden on our operating results and balance sheet is too significant to warrant continuing to subsidize and own these assets.

There is a lot here to unpack.

A non-recourse loan means that Park Hotels can literally “turn in the keys” and not have any further loan obligations. The company said it would work with the loan servicers to determine the most effective solution.

The loan was part of a commercial mortgage-backed securities (CMBS) pool. This structure means any investors in the CMBS will be negatively affected.

For the REIT, stopping payments on the debt will reduce the debt-to-EBITDA ratio from 6.0 to 5.1. The company expects to save $30 million of annual interest expenses and $200 million of maintenance CapEx over the next five years.

The cash savings will let the company pay a special dividend once the hotels are fully out of the portfolio.

For the larger picture, investors need to know where REIT properties are located. There is a mass business exodus out of San Francisco, so REITs with heavy exposure to that city or others with challenged business environments should be sold or avoided. This chart uses cellphone activity to show which downtowns have recovered the least from work-from-home policies.

Commercial mortgage investors are at significant risk. Banks, CMBS, and finance REITs own these loans. CMBS are typically by large institutional investors such as insurance companies and pension plans. Stay away from riskier finance REITs. There will be companies that can take advantage of financially stressed situations. Starwood Property Trust (STWD) has a long history of finding special opportunities in commercial finance.

Finally, this decision makes Park Hotels & Resorts a more attractive investment. I will keep a close eye on this lodging REIT.

Citigroup (C) is the third-largest lender in the U.S. and the least-loved major bank by investors—and for good reason…

The bank has been a chronic poor performer seemingly forever. Its low return on equity, poor stock market underperformance, and low valuation made the point for quite a while that Citigroup’s business model did not work and needed changing.

But changes at this disliked bank are now creating some great opportunities for investors.

Jane Fraser: the Broom Cleaning Up Citi

Changes began to happen after Jane Fraser became CEO in March 2021: she set about divesting Citi of much of its global consumer banking franchise, which had no synergies with its best businesses: transaction banking, credit cards, and fixed-income markets.

The changes she made are already starting to bear fruit.

On April 14, Citigroup reported a profit of $4.6 billion in the first quarter, up 7% from a year earlier and well ahead of the expectations of Wall Street analysts. Revenue jumped 12%. Citi’s loan book was roughly unchanged, and deposits fell 3% from the previous quarter, though credit card lending was up 7% from a year earlier.

However, UBS analysts said Citigroup still had “more wood to chop”—and the bank has proceeded to do so.

On May 24, Citi said it will spin off its Mexican retail bank (Banamex) through an initial public offering, abandoning a plan hatched early last year to sell the unit to another bank instead.

Banamex is one of the largest consumer banking franchises in Mexico. Citi said an IPO of the unit was likely by the end of 2025. Despite the spin-off, Citi does plan to retain much of its corporate and institutional business in Mexico.

At the time of this announcement, the babk also said it would resume stock buybacks by the end of June—at least six months sooner than analysts expected.

Mike Mayo, a highly respected bank analyst at Wells Fargo, said: “Citi is becoming a simpler firm. Jane Fraser is feeding the winners and starving the losers, as she should.”

In other words, Fraser is doing all the right things to turn Citi around. Yet, neither she nor Citigroup shareholders have yet been rewarded for doing the right things.

Citi Remains Cheap

Citigroup stock has continued to underperform the other big diversified U.S. banks, and its valuation remains largely unchanged. In fact, Citi’s price to tangible book value ratio is still edging down—to $0.54—as of June 2, 2023.

What is most surprising to me is that its valuation even trails some regional banks, with characteristics that scare investors, like lots of uninsured deposits and a large securities portfolio of commercial real estate loans.

So, what is the problem?

Despite all she has done, Fraser still has a lot to do. The numbers don’t lie…

Citi’s return on tangible common equity (8.9% in 2022) is lower than it was in 2019. And the gap with its big banking peers is still in the mid-teens, and has not narrowed. None of the divestments or other reforms so far have moved the needle.

The Financial Times’ Robert Armstrong reports that the valuation wizard, Aswath Damodaran of New York University, has made a strong case for owning Citi. Here is the link to what Damodaran wrote: good-bad-banks-and-good-bad-investments.

Damodaran wrote that Citi had ample regulatory capital and has been growing assets slowly, but steadily. He believes this means net income will grow over time. In order to assess the riskiness of Citi, he looked at net interest margin, regulatory capital ratios, dividend yield, return on equity, deposit growth, and securities portfolio accounting at the 25 largest U.S. banks.

In his analysis, Citi actually scored above the median on the first three of these six measures—meaning it had the best performance among banks that trade at a price/book discount. Damodaran added that Citi’s weakest link remains its return on equity (ROE). However, he also believes the discount on Citi is too much. He says that its banking business, while slow-growing, remains lucrative.

Finally, Damodaran said: “I will be adding Citi to my portfolio…It is a slow-growth, stodgy bank that seems to be priced on the presumption that it will…never earn an ROE even close to its cost of equity, and that makes it a good investment.”

I agree with Damodaran’s assessment: Citi is moving in the right direction. Jane Fraser is streamlining the bank, especially the planned exit of consumer banking in Mexico and the ongoing sales of its Asian retail banking units. These actions will release equity capital that can be redeployed to the company’s leading position in corporate treasury services, financial technology platforms, and expanding global wealth management business that has new leadership.

Dividend-wise, Citi has made a lot of progress. Its annual dividend in 2015 was just $0.16 per share; now, the annual dividend is $2.04 per share (a 4.42% yield)…although that has not changed for three years. I do expect dividend increases to resume in 2024.

Citigroup remains a deep value turnaround play, with a multiyear time horizon. Even so, investors have been more than adequately compensated to bear these risks. That’s thanks to the material upside to the stock’s current price of around $46 per share and a nice dividend—all without the deposit outflow risk of regional banks.

C is a buy anywhere in the mid-$40s per share.
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2023 has been complete opposites for most of the stock market. The Dow is around breakeven… S&P 500 up less than 10%… Small caps in between them… But the Nasdaq soaring nearly 27%. Crushing all their returns. The market hasn’t risen together. But I noticed last week we started seeing a broadening out of the

Today I want to continue with our pirate theme from Tuesday. While I do love the Pirates of the Caribbean – both the movies and the ride – I love the Pirates of the Financial Markets even more. I have made enormous amounts of money over the years tracking the filings and research from activist

 For investors who follow steel stocks, there may be some good news on the horizon. Steel companies have taken a hit in recent months, including Cleveland-Cliffs (CLF), which is down 14% year-to-date. However, a trader purchased what appears to be a bullish call spread in CLF options that expires in August. This 10,000-lot vertical spread

After watching large-cap tech stocks zoom higher over recent months, don’t you wish you could jump in your time machine and buy these stocks last year?

Or even a handful of months ago, as investors bailed out on tech stocks after values had fallen by 50%, 70%, or more.

Let’s use this as a lesson to buy stocks that investors currently hate…

It is hard to believe that 2022 was a bear market for tech stocks, with steep price declines. Let’s look at some numbers for a few stocks investors hated last year. Share prices peaked in late 2021 and bottomed in October 2022. Yes, the bear market lasted for almost a year.

The Invesco QQQ Trust (QQQ) lost 38%.

Microsoft Corp. (MSFT) dropped by 39%.

Alphabet Inc. (GOOG) fell by 45%.

Tesla Inc. (TSLA) lost 75%.

Meta Platforms Inc. (META) dropped by 75%.

NVIDIA Corp. (NVDA) fell by 69%.

And yet, these are the same large-cap stocks that investors love this year.

There are a couple of essential points to understand. Most of the 2022 bear market losses had occurred by May. Absolute lows were hit in October and November. Prices didn’t start a serious recovery until January. As a result, the stock market felt ugly for eight to nine long months.

Percentage changes can be funny. The most a stock can lose is 100%, but there is no upside for a stock that goes to zero. From a 50% loss, it takes a 100% gain to return to the previous high. It takes a 300% gain to recover from a 75% loss.

Here are the results for the listed stocks since the low prices set last year:

The Invesco QQQ Trust (QQQ) is up 38%.

Microsoft Corp. (MSFT) has gained 55%.

Alphabet Inc. (GOOG) has gained 45%.

Tesla Inc. (TSLA) has rocketed 85% higher.

Meta Platforms Inc. (META) is up 198%!

NVIDIA Corp. (NVDA) has ridden the AI craze for 273% appreciation.

To make these types of gains, you needed to invest when these stocks were not the ones everyone wanted to buy. Buying and owning these stocks when the market was selling off also required patience. As I noted above, these stock prices bounced along near the bottom before starting a sustained uptrend. There were several false starts to the tech sector bull market that began in earnest in March.

The gains for the large-cap tech stocks listed above are in the past. You must look at out-of-favor sectors and industries to get in on the next sector-centric bull market. Here are three that may provide superior returns over the next couple of years…

Banking/finance is an obvious choice. Regional bank share prices have been hammered following a couple of high-profile bank failures. The iShares U.S. Regional Banks ETF (IAT) has lost 30% in the last few months and is down 50% from the late 2021 peak. IAT is an excellent way to play the regional banks. The fund also yields over 4%.

Business development companies (BDCs) offer a different type of investment in the finance sector. BDCs don’t have to worry about deposits, plus they use little debt and benefit from higher interest rates. Hercules Capital (HTGC) currently yields over 11%. And, the company pays supplemental dividends. The HTGC share price of $14.70 is 1.35 times the book value—and the book value is growing. Historically normal pricing would be at 1.5 times or higher.Real estate investment trust (REIT) share values participated in the 2022 bear market, and they have continued to fall in 2023. Specific REIT sectors (office, medical) do face challenges. However, well-run companies also have tremendous opportunities to take advantage of distressed property owners. Simon Property Group (SPG) trades for $103, yielding 7.2%. This was a $180 stock before the pandemic. Investors have not yet discovered that business is very good for Simon.

There’s a dirty game Wall Street plays.  It’s been going on for ages so this isn’t something new. But it’s something many investors may not know about.  As you’ve seen, many companies recently are handily beating earnings estimates even while consumer sentiment is hitting lows.  What’s going on here?  Well, in my Thursday video, I’ll

The financial results for the Home Shopping and QVC television retail network’s owner have been, frankly, terrible for the last two years.

But the company is almost one year into its “Project Athens” turnaround plan, and if the plan is successful, one particular security could pay off very nicely…

Qurate Retail (QRTEA) owns and operates the two home shopping networks. Qurate was part of billionaire John Malone’s Liberty Media empire. In 2018, Liberty spun off its cable TV operations and other businesses, renaming the HSN/QVC business as Qurate Retail.

Qurate was hugely profitable, earning more than $2 billion in 2019. In 2020 the company paid a special dividend in the form of a new preferred stock, the Qurate Retail 8.0% Cumulative Redeemable Preferred (QRTEP). The preferred shares have a $100 par value and pay a $2.00 quarterly dividend. Uniquely, QRTEP had a mandatory redemption at par on March 15, 2021.

As the pandemic unfolded, Qurate ran into supply chain issues, worsened when its primary warehouse burned down. Profits almost completely dried up, with the company reporting losses for the last half of 2022 and the first quarter of 2023. The QRTEA value fell from above $12 in mid-2021 to below $1.00 today.

Even though it is a preferred stock, QRTEP went from trading steadily around par (actually up to $109) until October 2021 to declining along with the common stock shares. Over the last 18 months, QRTEP fell from over $100 to currently trading for about $35. From the stock prices of both shares, it looks like the market expects an eventual bankruptcy for Qurate.

In June 2022, the company announced a five-point turnaround plan dubbed “Project Athens.” The initiatives include (from the 2022 annual report):

Improve customer experience and grow relationships

Rigorously execute core processes

Lower cost to serve

Optimize the brand portfolio

Build new high-growth businesses anchored in strength

Since the start of Project Athens, the company has been working to strengthen its balance sheet. Property has been sold and leased back, debt paid down, and last week the company sold its Zulily online sales division and used the proceeds to reduce debt further.

Management’s stated goal is to return to profitability by the second half of 2023. If that goal is reached, the QRTEP share price will start to recover.

QRTEP shares offer a unique opportunity. The share price is $35 and the shares earn an $8.00 annual dividend, for a 23% current yield. The shares have a mandatory redemption for $100 in March 2031. If Qurate stays out of bankruptcy, a $35 investment now will return $160 in dividends and redemption value over 7.5 years. This is cash that must be paid if the company remains in business.

I am closely watching the quarterly results. QRTEP is on my Dividend Hunter recommended portfolio list. To see what other great income investments I’m looking at, take a look below.
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An intriguing 3-legged options trade occurred in ride-sharing giant, Uber (UBER) last week. This strategy, known as a put spread collar, traded 24,000 times and has an August expiration. The purpose of this trade is generally to protect the downside for those that own the stock. With a put spread collar, the downside loss is

“Buy Low, Sell High.”

That is the way all this works, right?

Buy stocks when they are low, and no one wants them.

Then, when everyone wants to buy stocks, it is a great time to sell and book your gains.

One of the great truths of Wall Street is that fortunes are born in bad markets.

The other great truth is that most people will be too afraid to buy stocks when markets are falling and unable to resist buying when everyone they know is excited about the stock market.

Right now, there is an opportunity to buy one of the most important segments of the market at a massive discount to the value of the companies in the industry.

Those that take advantage can expect to reap massive rewards over the next three to five years.

The secret of getting rich in stocks is to buy when there is blood in the street.

Are you brave enough to get rich?

Let me show you how…